T1 Energy Inc (FREY) 2022 Q2 法說會逐字稿

Good morning and welcome to today's FREYR Battery Second Quarter Earnings Conference Call. My name is Candice and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call. With an opportunity for question and answer at the end. (Operator Instructions)

I would now like to pass the conference over to our host, Jeffrey Spittel, President of Investor Relations. Please go ahead.

Good morning, good afternoon and good evening. Welcome to FREYR Battery second quarter 2022 earnings conference call. With me today on the call are Tom-Einar Jensen our Chief Executive Officer, Jan Arve Haugan, our Chief Operating Officer and Oscar brown or Chief Financial Officer.

During today's call management may make forward-looking statements about our business. These forward looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expectations. Most of these factors are outside FREYR's control and are difficult to predict. Additional information about risk factors that could materially affect our business are available in FREYR's S-1 and Annual Report on Form 10-K filed with the Securities and Exchange Commission, which are available on the Investor Relations section of our website.

With that, I'll turn the call over to Tom.

Thank you, Jeff. And Good morning. Good afternoon, good evening, everyone. A true pleasure, of course, to welcome you back to our fifth quarterly report for our second quarter earnings of 2022. Since the first quarter earnings call the momentum around FREYR has increased significantly and today, among myself, Jan Arve and Oscar will take you through the status and progress and outlook of the company which continues to strengthen on an accelerating basis. So we'll take you through a broad variety of updates in the company. And I'll do that as stated together with our Chief Operating Officer and our Chief Financial Officer.

I stated last time, we're starting to look like a battery company, and we're now increasing our ambition levels based on our demonstrated ability to deliver on commitments and the increased market demand that we're seeing and manifesting itself across all market verticals. Lithium-ion batteries is a solution which increasingly can support an accelerated energy transition and can provide direct or indirect support for close to 75% of all climate mitigating targets. A lot of players are entering this space, but only the ones who move at pace and build that scale and pay true attention to sustainability will prevail.

We are increasing our penetration across the board with customers, technology providers, investors, governments, talent, raw material providers and equipment suppliers to name but a few. We see very strong momentum to accelerate delivery of modularized and scalable solutions for clean battery solutions, while an increasing number of customers are increasing their appetite for the same.

When we started FREYR more than 4 years ago, we had a dream on what we could become, but we had not envisaged that we wouldn't be able to move as fast and as forcefully as we have. We have more than 10-fold of the organization over the last 18 months and implemented what I dare say is a world class industrialization system resonating with an increasing number of stakeholders around the world.

Demand keeps increasing and our customers' need both that we speed up in our delivery at the same time as we deliver the most cost competitive solutions to reduce energy inflation, which is all around us at present. We are doing all of that and in a sustainable manner. And I'm very proud to say that we are largely on track even in the most challenging macroeconomic environments seen for decades. This is due to deliberately and diligently building up an organization based on the century long experience Norway has in producing and exporting energy, energy intensive and process intensive products. In both direct and indirect forms.

Today it is on track to deliver on our previously stated ambitions by 2025. And we are doubling that ambition in the following 3 years and then doubling that again 2 years after that. Size does matter in this business and the market situation and our increasing number of customers demand it. We now have more customer dialogues ongoing than what we realistically can cover. And that is a very good situation to be in, which all in all leads us to double our target capacity installed globally to 200 gigawatt hours by 2030 across multiple geographies.

As in any renewable industry analysts and consultancies are just not able to keep up with the pace of development. And this manifests itself over and over again, in the battery industry. Demand forecasts are constantly changed upwards and this trend has been even more pronounced in the industry that we find ourselves in. What is very encouraging for FREYR is the massive underlying momentum that we're now seeing manifests itself in the energy storage space, which some argue could and should more than 40 fold by 2030. We don't disagree to this statement by the way.

We do however, target all market verticals, but we could if we wanted to dedicate all of our focus entirely on the storage space and applications, as there's more than enough to do in this space alone for FREYR's organization for decades to come. We do however see that our industrialization partner of choice approach, coupled with the cleanest battery solutions attract a lot of interest from existing, as well as, emerging players across all verticals and across all geographies.

Our aspirations currently have 200 gigawatt hours of installed capacity by 2030 will make us a relevant player on the global arena. But as these illustrations suggest, if anything, the risk is on the upside, as long as, we continue to deliver on our promises, having a broad spectrum of customers across the market verticals that we are targeting and the industries that we're engaging ourselves in will allow ourselves to optimize our customer portfolio and therefore be value accretive to our investors in what we believe will be a massively market short environment for the coming decade.

A core part of this interest is driven by our relentless focus on stating what we want to achieve and then reporting against these [2 months]. FREYR will always be transparent and direct about our status and progress. And so far we have been able to overcome a number of challenges and keep momentum. This is driven by our mantra of speed, scale and sustainability, and to be able to report that we are on track for starting production for Giga Arctic in the first half of 2024 and that we are on track to have all equipment installed in the customer qualification plant by year end is something that I'm deeply proud of being able to reconfirm to our investors.

Governments have an important role to play in this very capital intensive industry. And we have very strong support from the Norwegian government. And we're very encouraged by the inflation Reduction Act announced in the U.S., which Oscar brown our group CFO will cover a little bit later.

We therefore see that we can leverage the Norwegian development even further and accelerate our plants in the U.S., and we very much look forward to announcing our choice of site in the U.S., already later this year. We should be able to start up what we now labeled Giga America in the 2024-2025 timeframe at an even higher capacity than Giga Arctic, which will deliver our current ambition of 50 gigawatt hours installed by 2025.

Let me talk quickly about Giga Arctic. This will be our flagship development, and it's becoming a showcase for us, and we have upsize that upsized and improve this facility several times through our excellent organization. We now believe we can build 29 gigawatt hours of LFP capacity, which is almost 3 times larger than what the equivalent facility Giga 1 and 2 would be as we announced when we went public on the New York Stock Exchange last year.

This facility will be one of the most modern battery facilities in the world in stunning environments in the north of Norway inside what we believe is the best and most effective industrial park in Norway. We have already cleared ground and we are working day and night to pour concrete and establish foundational works so that we can be ready to start up this more than 120,000 square meter facility which will be one of the most if not the most efficient battery facility worldwide.

In this context, it is extremely encouraging to see how capital effective this facility will be compared to all other facilities in Europe in operation or under construction. This very strong capital efficiency is primarily due to the highly space efficient nature of the 24M Technology, as I've talked about many times coupled with our upsized facility compared to previous and our excellent project execution centric organization leadership who have been able to optimize the capital efficiency of this facility.

As the world needs to build hundreds of Giga factories over the coming decades to keep up with demand in the market segments I just alluded to, finding the most capital efficient solutions will be key to success. And therefore we are extremely encouraged to have this highly comforting stopping point. We are very proud to be the first to take the commercially proven 24M Technology to gigawatt hour scale, and we will lead the way into next generation lithium-ion battery solutions.

On top of this we will also be able to produce more than 200 times more batteries per employee than current conventional lithium-ion battery solutions. And we will use 100% renewable and ultra-low cost electricity to deliver on those battery production capacities. So the future for FREYR looks very strong indeed. And we have a very strong cost competitive starting point to replicate around the world.

This is then what the Norwegian government has been seeing as we have been in intense dialogue with them since we started to make ourselves known in the Norwegian scene, some 4 years ago. And 6 weeks ago, the Norwegian government decided to launch their national battery strategy on site together with FREYR in Mo I Rana, clearly a testament to our leading position in the Norwegian battery industry.

Norway aims to become a leading nation, not only in battery cell production, but across the entire battery value chain and our very close relationship with the Norwegian government and all Norwegian institutions is cementing our position as the lead in Norway. This deep financial, strategic and political support unlocks additional value-creating opportunities, including the establishment of the entire value chain and battery ecosystem in Norway and the Nordics. And the Nordics is emerging as a core hub for battery production and the materials going into it. We are very grateful to the Norwegian government who will now channel Norway's century-long experience in energy, energy intensive and process-intensive industries and apply this to the battery ecosystem.

Let me now hand over to Oscar Brown, our Group CFO, who will bring you our perspectives on the Inflation Reduction Act in the U.S., which is already accelerating our activities in our plants in the U.S., together with our excellent partners Koch strategic platforms. Oscar, over to you.

Thanks, Tom. And on Slide 11, with just a few of the highlights noted, I can say we were quite excited to hear about the U.S., Inflation Reduction Act, which would have an extremely positive impact on FREYR's ongoing efforts to establish a major manufacturing presence in the United States. As proposed, FREYR would benefit directly and indirectly from the bill, and that certainly has accelerated our ongoing efforts with Koch regarding our U.S., joint venture to build what we are now calling Giga America.

As Tom mentioned, we have narrowed our site selection from nearly 150 potential locations to less than 5 and anticipate announcing a decision in the near future. The Inflation Reduction Act would benefit FREYR in Giga America in a number of ways, including a $35 per kilowatt hour tax credit for cell manufacturer in the United States, a $10 tax credit on the manufacture of module impact, and a 10% tax credit related to the production of anode and cathode materials in the U.S.

As important, the simplified ability to transfer and monetize these tax credits, including a direct pay option is incredibly helpful to high-growth companies like our own. These benefits should substantially improve the economics of U.S. Giga factories, stimulate already strong demand for energy storage system products and battery storage development projects in the U.S., by reducing cost and facilitating U.S., supply chains, thus also reducing the industry's carbon footprint.

The bill also includes a number of direct benefits for our customers as well, including an investment tax credit for stand-alone energy storage developments, meaning no need to tie these storage developments to specific solar or wind projects to claim the credit. For FREYR this bill is a catalyst for our U.S., strategy, much like the Norwegian National battery strategy was to us in Norway. We said last quarter that FREYR is part of the solution for energy security, energy inflation and climate change. These initiatives by the governments of the United States and Norway will accelerate our mission.

Moving now to Slide 12 of the earnings deck, I will review our financial results for the second quarter and the first 6 months of 2022, as well as, provide an update on our Giga Arctic financing initiatives. For the quarter ended June 30, 2022, FREYR reported net income of $4.7 million or $0.04 per share compared with the loss in the same period last year, which predated our New York Stock Exchange listing. For the 6 months ended June 30, the company reported a net loss of $30 million or $0.26 per share. The reason for the reported net income at this stage of the company's growth has to do with the warrant liability fair value adjustment of $33 million in the second quarter and $25 million in the first 6 months of the year. This liability moves around period-to-period based upon, among other things, the company's stock price at each period end, generally reporting gains in the stock declines and losses when the stock rises.

More importantly for us today is our cash investment rate. We spent net cash of $36 million during the second quarter and $77 million for the first 6 months of 2022, ending the second quarter with $488 million of cash and equivalents and no debt. As shown on the financial update slide in the earnings deck, naturally, cash flow spent on corporate overhead, operating expenses and capital expenditures, primarily supporting the customer qualification plant in the Giga Arctic, as well as, initial spending on our U.S., Giga factory joint venture with Koch, our proposed project in Finland and other business development activities. As mentioned last quarter, the mix of CapEx and OpEx will skew more towards capital expenditures in the future, particularly as Giga Arctic as the project matures.

With FREYR's Board approving some incremental spending and commitments to continued progress on Giga Arctic and maintain our scheduled start of production in the first half of 2024, we expect our expenditures to increase in the third quarter and for the second half of 2022. Additional spending beyond Q3 will be dependent on continued progress on the ongoing commercial and financing initiatives.

With respect to financing, we announced in late June, we had identified in excess of $1.6 billion of potential credit support for Giga Arctic at the same time as the Norwegian government announced its national battery strategy at our construction sites in Guyana. Last month, we formally launched Stage 1 of our project financing process. We've approached 14 commercial banks, led by our 2 mandated lead arrangers, as well as, 4 export credit agencies, including Eksfin and 2 Multilateral Development Finance Institutions, or MDFI's, the Nordic Investment Bank and the European Investment Bank.

This first stage with these 20 institutions is a market sounding process, which both continues to educate the credit market on our store specifically and Giga Arctic and request indications of interest and feedback regarding targeted gearing, pricing of the various credit facilities, key credit ratios and the like, as well as, amounts each institution could potentially commit to, all subject to due diligence and formal credit approval. We expect this feedback later this quarter and all indications so far are very positive.

In addition to the indications we've already received earlier this year from Eksfin, the EIB and NIB totaling up to $800 million. We have also received several favorable early indications of interest from our commercial banking partners. This next stage will be -- the next stage will be launching later this month, which is the formal project financing due diligence process. As many of you may appreciate, it is quite thorough and involves a large number of external consultants. Following due diligence, we are targeting formal credit approvals towards the end of this year and financial closing in the first quarter of next year.

We're incredibly pleased with the ongoing support of all our financial and industrial partners, including our shareholders and our progress on all fronts, as well as, the continuous improvement in demand outlook for our products and the urgency of addressing climate change being demonstrated by business and governments around the world.

With that, I'll turn it over to Jan Arve for the operations update.

Thanks a lot, Oscar and hello to everyone. I will now try to give you an update on the operational status in FREYR. I will cover the development of the execution of the customer qualification plant or the CQP as we label it. The preparation for the final investment decision and the project execution of the Giga Arctic as well as the latest general project development for the next Giga factories, before I finally give you an update on the supply chain status.

First of all, the customer qualification plant was formally decided in July last year. Increased focus on the health and safety as construction now is moving from the manufacturing plants and into the installation phase. We can report now serious incidents. We have (inaudible) incidents and the total rate of incidents are also 0. And even more important, we have very good reporting of safety observations in total, 62 reports have been received to that.

As can be seen from the latest pictures from the factory in Mo, the core part of the plant, which is the dry room is now completed as far as building and infrastructure is concerned. The air conditioning unit is now installed and tested. As per end of July 7 out of the 9 production line packages had either been completed the factory acceptance test or we're in the process of executing the factory acceptance test. Shipment to the plant in Mo i Rana is now scheduled and the installation program is being detailed out. Our clear ambition is to avoid major carryover scope from the manufacturers to the installation phase, optimizing the details can, to some degree, transfer scope into the installation program but still under surprise (inaudible).

We certainly see challenges. General supply chain issues, logistics and COVID-19 as well as sourcing of semiconductors hit us, too, but it's a token of appreciation to the project teams that openness and transparency and in particular, collaboration and cooperation with the key suppliers, are supporting a continuous and joint problem solving and the work around planning. And I remind ourselves it's still 140 days until Christmas this year.

Further on, the operational update, let me share with you the latest status of the Giga Arctic project. FREYR passed a very important milestone in June when our internal decision Guide number 3 was approved by the Board, and we officially announced this. Imminently, the first concrete foundations were costed and our project team and the key contractors when mandated to initiate the detailed process design, as well as, approaching the supplier industry for tendering of all key components of the production line equipment.

FREYR's project execution team is now integrating all selected suppliers in a collaboration phase to complete the front-end engineering design in order to release the technical specifications and the estimated [below] quantities for purchasing of the production line equipment. We plan to submit the first call-offs for long lead items and critical part structural steel this week. It is our main contracting strategy to develop frame agreements with key suppliers, preliminary, primarily building on the competitive contracting for the CQP where we secured options for the Giga factory project program.

However, competitive bidding will be used if the benchmarking of these options proved to be inflated. Project schedules, interfaces, lead times and integration is being planned in detail to meet the Giga Arctic start of production date in the first half of 2024. At the bottom of this slide, you also will see a profile of the Giga Factory. And Giga Arctic has been used as a design basis for an optimized cell manufacturing plan.

As we have stated before, the modular eyes and continuous process flow has been an important design criteria in order to support operational excellence and high safety and build on -- on high yield of production. It is our clear conclusion that the 24M design can easily be replicated into other locations and support FREYR's strategic ambitions to meet the demand of batteries in other regions. Subsequently, we are currently maturing the concept design for an optimized cell manufacturing facility that rapidly can be tailor-made for the specifics of our relocations.

So let me please then share with you some thoughts in this following slide. This is a swift sketch on how we see the optimized 24M production system, and how it can be organized. We conclude that the 2 core process lines -- that 2 core process lines can be arranged into one dry room. This will allow for what we call a tandem production by the operators. That means that a set of standard operating procedures can cover both lines. Further on, there's 4 lines in 1 building structure and another 4 lines in the second structure is an optimized arrangement for phased capacity buildup and production ramp-up.

All production lines sectioned into a straight line labeled, I-shape is the best way to arrange the process for continuous flow, avoiding batch production to the highest extent. Uptime of the core process is, of course, then the key design criteria that will support the yield of the plant. Based on the overall arrangements of functional design -- and functional design criteria, the team now has built a design basis for this optimal plant that can be replicated.

As can be seen on this slide, an 8-line plant will cover some 120,000 square meters. Building an optimal land plots is approximately 700 meters long and 230 meters wide, catering for the inbound and outbound logistics at respective shortens, as well as, an easy access to the process steps on the long side for maintenance and expected upgrades of the modularized production line.

So as Tom indicated, we are now currently evaluating different sites, and we have started with approximately 150 sites in 25 states, and it's narrowed down to less than 5 shortlisted where we are [toured] now in June, and the team is now continuing and narrowing down based upon the latest input from the different short-listed locations. And we are, as indicated by Tom prove soon to decide which one of those locations that we will go for.

In Finland, we also had the MoU with the city of Vaasa that provides fair with an exclusive right to 130-hectare site for the battery cell plant. Groundwork is already ongoing, and we can -- we are ready to start construction in Q4 of 2022, if that is decided. There is one more plot next to ours which is currently reserved for other operations that might become available in November 2022. The governmental support is a higher importance to FREYR, and we are well aligned with the Vaasa local municipality and with the Finnish authorities.

Last but not least, from an operational side. Let me now give you an update on the supply chain. First, we have now secured a PPI with a Norwegian-based energy producer stock for the dedicated production of guaranteed renewable energy to the Giga Arctic plant and to the CQP. We can again confirm that this PPI is agreed at very competitive rates -- at rates and very good conditions. The primary task today for us is to secure raw material to the CQP, and at the same time, build the security of supply for the commercial production in Giga arctic. This is all based on the 24M Technology with prequalified suppliers.

In addition, we have the strong partnership with our partner, ITOCHU of Japan for both the sourcing and the logistics. Currently, we have 6 out of 12 firm reservations confirmed and agreed in contract basis and related conditions. We have made the volume reservation on supplier side until 2028 based on the nonbinding volume forecast on FREYR. In case of major changes to the forecast each year ahead, volume reservation and, of course, pricing shall be negotiated for the coming year.

The remaining 6 suppliers are in good progress. Supply teams are now meeting all the suppliers for quality control, ESG-related checking and building the relations while sharing the strategy of FREYR going forward with the suppliers. Increased focus on qualifying additional supplies with the specifications of 24M is now current dedicated team in R&D in (inaudible) and in Japan, is predominantly focusing on testing alternative raw materials that can supply 24M Technology in addition to them that 24M requalified themselves.

Further on, as we have announced previously, focus on decarbonization cleanly also drives towards localized raw material processing in the Nordic region, in particular, where renewable energy is relatively low cost and also high security of supply. A prime project is now to develop the process plan for LFP cattle material based on license agreement with Aleees that we plan to localize in the Nordic region. Our project team is planning for an FID for the cattle plant in order to meet production volumes required for the Giga Arctic ramp-up.

So to sum up, operationally, we are continuing to commit to deliver, and we are delivered as committed. By this, I will now hand the word over to Tom, who will share some strategy and concluding remarks before we go into the Q&A session. Over to you, Tom.

Thank you, Jan Arve, and thank you, Oscar, for those comforting run through of the financial and operational status of the company. It's clearly easier for me to lead this company with such excellent support from both of you and the team surrounding you. But as you can see, we are moving fast forward on multiple fronts. We have secured ultra low-cost energy, and we're advancing strongly towards our localized supply chain. Having a localized supply chain with renewable energy playing into that processing will not only both reduce costs significantly compared to others, but it will also enable us to advance faster towards our ultimate ambition of zero CO2 emissions on a life cycle basis.

Our initial ambition is to have that reduction by 80% in the very short order, and we're well on track to achieve that through the initiatives that Jan Arve mentioned. While this is important from a climate mitigating perspective, it is also supporting an even greener bottom line. As reaching our ambitions in the medium term could generate, as depicted by this slide, gross value of more than $150 million per year for Giga Arctic alone.

FREYR, will not survive as a company unless we are at the absolute left-hand side of the cost curve and being the cleanest battery solutions provider globally supports that ambition much more than most people realize.

So to sum up, we are on track, and we keep pushing relentlessly ahead to deliver the cleanest battery solutions to an ever-increasing customer base across all market verticals. The traction on the customer side integrated with our financing efforts enable us to move forward in our stage FID process towards start of production from Giga Arctic in the first half of 2024, with new volumes coming out of additional facilities in the U.S. and Finland subsequently thereafter.

We are accelerating our plans in the U.S., and we are increasing our ambition levels as our customers require more volumes than previously thought, and they also value geographically diversified supply. We are emerging as an industrialization partner of choice for established players in the battery space from Asia to the U.S. This is true for technology providers, raw material providers, equipment providers, customers, investors, governments alike.

You should expect material news from FREYR in the weeks and months to come from all of these different arrangements as we convert our initial off-take agreements to firm value accretive contracts and add technology and geographical diversification to the mix. We would not have been here without our investors. So I have to, on behalf of the board and everyone in FREYR to thank all of you very much for your support to-date.

We will keep growing, and the FREYR team can promise you that we will do our utmost that the journey ahead will be a deeply rewarding one. It is obviously more pleasant to talk to you today than it was on the 11th of May, and the underlying market conditions for battery [plays] like us is increasing day-by-day. Our promise and delivery is based on producing the cleanest, safest and most cost competitive battery solutions in the world. We are on track to deliver on that ambition.

And with that, I thank you for your attention and hand it over to Jeff to guide us through the Q&A. Jeff, over to you.

Thank you, Tom. Operator, we're ready to open up the line for questions.

(Operator Instructions) So our first question comes from the line of (inaudible).

I thought I would start with some questions regarding your expansion ambitions. So you mentioned doubling ambitions towards 2030. Do you have any outline or do you have any ideas about where that will be? Would it be predominantly in Norway, Scandinavia? Or are you aiming more towards this market for developing additional deal factors?

So we are targeting, as alluded to 200 gigawatt hours of installed capacity by 2030, 100 gigawatt hours installed by '28 and 50 gigawatt hours installed by 2025. Needless to say, the first facility we will build is the Giga Arctic facility already underway. This will be LFP production in the Nordics, most likely the second facility we will build will be in the U.S., which will be probably a larger facility and Giga Arctic, probably also to a large extent, LFP capacity for the storage markets, but we are seeing increasing interest from commercial vehicle and electric vehicle producers as well.

Generally speaking, you should sort of have as a rule of thumb idea that the 200 gigawatt hours installed capacity by 2030 will be roughly half in Europe and half in the United States. That's at least a working hypothesis right now, and it will probably be half LFP and have higher energy density materials. This is something that is extremely dynamic and constantly sort of changing, and to sort of support that notion.

As mentioned previously, we have an extremely flexible technology in the 24M platform, so this coupled chemistry is change and the sort of main interest in couple moves from one particular solution to another, we are able to adapt our production system to cater for that. But generally speaking, 50-50 U.S., Europe and 50-50 and NMC, LSF by 2030 is a rule of thumb that you can have in the back of your head. And as we're progressing towards that, we will give you more specific updates as and when we contract out the different production lines that we are developing.

And then just a follow-up on the U.S., factory. I saw that you outlined approximately $61 million per gigawatt hour for production in Norway. How do you see that potentially increasing with building factories in the U.S.

So we think that we will implement 8 production lines of so-called Generation 3 equipment in the U.S. If all of that is LFP and it's the Generation 3 equivalent that we're having in Giga Arctic should expect the capacity of Giga America are working title for our facility in the U.S. to be around 35 gigawatt hours, but that might sort of change a little bit. But directionally, I think that's what we're aiming for in Giga America, the way we'll see it now. But bear in mind, this is reasonably early days relative to Giga . So there might be some changes in that. But directionally, this is what we are looking at, at the moment.

And just a last follow-up on that. Do you still expect, I know it's early, but you still expect CapEx for gigawatt hour to be the -- in the same range as well to be in the Nordics in the state? Or would we be reasonable to assume an increase for the U.S. factories?

Well, given that we will have the same number of production lines and that we have an optimized an idealized sort of solution for it. If anything, we expect the CapEx intensity for that facility to go down. But we will come back with updated estimates on that when we're a little bit wiser somewhat later this quarter.

Our next question comes from the line of Philipp Konig of Goldman Sachs.

My first question is also coming back to the U.S., and the potential benefits from the Inflation Act. You had a very nice slide where you pointed out a different potential incentives across the value chain. Can you maybe just point out how has that changed in terms of your strategy for the U.S.? Where do you see the largest opportunity? Does it also make a difference up thinking about your value chain and localizing more of the production in the U.S?

Then my second question is also on localization, but more in Europe. I'm just wondering on the LFP cathode plan, is there may be a bit more detail on sort of the time line and how will it work? Would you license the technology from a lease? Or would you build the cathode plant together with them, and then potentially also offer to customers outside of yourself?

And lastly, I just wanted to hear your thoughts around recycling. I know when you announced the sanctioning of the first Giga factory there was also that you saw some potential investment on the recycling side. What is your strategy there? We are very keen to hear your thoughts on that matter?

So when it comes to the U.S. and the Inflation Reduction Act, clearly, the incentive package now sanctioned yesterday by Senate is very strong and clearly increases the impetus not only for battery cell manufacturing capacity to be established in the U.S., but for the entire value chain. So if anything, this just accelerates and increases our desire to build facilities in the U.S., including localization of upstream materials and for that matter, downstream development based on our battery cell manufacturing footprint. The most capital-intensive part of this value chain, as you know, is the battery cell manufacturing facility.

So therefore, for us, that's kind of a center piece, if you like, of our development, and then we will add the upstream and downstream thesis around this, again, in a partnership-based way, focusing again on the speed scale and sustainability mantra and renewable energy is going to be core for us, where we locate ourselves in the U.S., and our site selection process that we are well advanced in moving from more than 150 locations across 25 states to now less than 5 and let's call it, final contenders, all sort of show very promising features in terms of not only these more general incentives on a federal level, but also state-by-state, very strong sort of packages to support an accelerated development in the U.S. So expect us to move forcefully forward together with our partner, Koch Strategic Platforms, who've been very active in the process of our site selection to-date. And you should expect a lot of news on our development in the U.S., in the weeks and months to come.

When it comes to a lease and the cathode plans in Norway and/or in the Nordic region. You should expect us to develop and build capacity that will at least feed Giga Arctic with cathode material on an LFP basis. This will be a licensing arrangement, most likely, and we will build it either in -- either or in Norway and Finland. That's the way it looks now. We are quite advanced in the planning for this and timing for it will be so that we can gradually start to feed Giga Arctic with localized material using also renewable energy to produce it.

This is a big part of reducing the costs, not only eliminating the logistical cost of transporting processed active material, but also using lower cost renewable energy in the processing of it that matters a lot. So it's a licensing arrangement. And you will probably also see us building more capacity than we need ourselves, either for additional facilities in the FREYR universe over time and/or for potentially our sister and brother licensees in the 24M family will also be needing decarbonize the low-cost LFP material.

So on the third question on recycling, we are, of course, as any other battery player, very active and preoccupied with how we engaged in the recycling arena. We're talking to and investigating the best option for us in this regard. We fundamentally believe that recycling of black mass and active materials for production of future battery cells will be important. But it's probably some years into the future until we can rely on a reasonably steady and growing, let's say, flow of materials coming from recycled solutions.

So therefore, we are carrying slowly in this regard. We're talking to all the established players and the leading newcomers in this space, and you should be expecting us to make judgment calls on that in the not so distant future. Clearly, recycling is core. The first large-scale battery recycling facility in the world has been built or is in commissioning, I would say, in Southern parts of Norway. And therefore, Norway is here also at the forefront of the battery industry, and we will benefit, of course, from proceeds kind of observation to this. But again, our choice of partner in this regard is something that we'll come back in due course.

Our next question comes from the line of Maheep Mandloi of Credit Suisse.

First one, just on the time line here, like on the FID definitely saw the good news over the last month on the debt financing or the initial talks on it. When should we expect an update on that end? Or is the trigger basically coming from the customer arrangement or something else which could act as a precursor for that?

Yes. It's Oscar. I'll tackle that one. So as you saw in the press release, the board approved increased commitments of $70 million in the third quarter. So we could buy some long lead time items and stay on schedule for our first half 2024, start of production for Giga Arctic. So maybe I'll also give some guidance to cash uses during the quarter, though, we'll probably be about $60 million to $70 million. We won't spend all of that commitment necessarily in the third quarter, and that's before changes in working capital. So really the driver of sort of the [next release and next release], the way we're looking at this is just continued progress on the commercial side, on financing, on joint ventures and sort of all the things that Tom has been referring to. So we're continuing to be on schedule releasing just enough activity to stay on that schedule. We'll make the further commitments down the road when we're sort of ready to do so.

And then just on the [IRR], and there's a lot of good information on that, I appreciate that. But if you can kind of like talk about pricing here. I think some of your contracts you discussed some arrangements even for the Giga Arctic for U.S. site [business], $30 per kilowatt-hour subsidy or production incentive. Does that change these discussions with your customers in terms of like what that pricing could be for the deliveries? Or how do you think the $30 kind of impact pricing going forward for you, at least for the U.S. market?

Well, so great question. And of course, this was passed in Senate yesterday, right? So still that has congress and it's reasonably nascent, right? So it hasn't really filtered into our customer discussions in a material way yet. So what I can say, of course, is with the structure that has been envisaged, the interest in an appetite for the entire battery value chain acceleration and organization in the U.S. is clearly now in a different level than what it was a couple of weeks ago. And so, this will, of course, enable us to provide improved overall economics across the entire value chain in the U.S.

So what this will clearly sort of unlock is an acceleration of the U.S. battery industry and having a already structured and modularized setup for rapidly rolling out next-generation world-leading battery solutions like we have now developed and are building in Norway will give us an edge with all of our customers, many of which also will require volumes to be produced in the U.S. So this is very good news for us. Exactly how the delineation of these incentives will be across the different stakeholders in the value chain will play itself out in different ways and forms I'm sure.

But the good news is that for a cell producer, this will allow for a massive uptick in value creation in the U.S. and building more facilities, creating more jobs and sort of developing more battery-driven energy transition activities in the U.S., which we, by the way, have been very clear on all along. And when the U.S. wakes up to this energy transition in a material way, which this bill clearly sort of is a testament too, a lot of momentum will happen in the U.S. And we are ready to engage and are already on the ground finalizing where we're going to build the first facilities.

And just last one from me. There's some tax in the bill, which requires some of the battery materials, [for EV] at least to come from countries where U.S. has created agreements from. Just how does that -- or does that benefit the Norwegian, the Giga factory operations -- does it make it easier for you to kind of flagship those things over here into the U.S?

It does, it's Oscar. It does, it's helpful, obviously. And I think look, it's helpful for all the competitiveness of all Western sort of battery manufacturers and Western located battery manufacturing facilities. So anything that we see, there's a whole list of items that are very favorable and that we could go on and on. In addition, there's some great outcomes for our developer customers here as well. So we expect ESS demand to accelerate further based on this, given some things like the investment tax credit and other related items that just makes it easier for developers who are customers for ESS as well. So it's great across the world.

(Operator Instructions) Our final question comes from the line of Greg Lewis of BTIG.

Tom, I was just looking for a clarification around -- you kind of alluded to customer interest and demand largely being -- I don't know if you quite said sold out, but it's clearly selling off. When we think about that, is that kind of -- is that just for the Arctic Giga factory? Or at this point in time, we're starting to kind of fill up, I guess, in the U.S., I wouldn't think so, but I just want to understand if we're -- how those discussions are progressing?

So the way we're thinking about this is from a macro perspective, we see for the next decade, a fundamental market short, and we think that market short is widening. As mentioned in one of the slides, we see demand picking up quite significantly across the board for all market verticals. And we think that, that demand increase will just keep increasing given the underlying driver of climate change needing really to sort of speed up the energy transition, at the same time, we see that there's a lot of new entrants in this space claiming to the building and have plans to build Giga factories. We don't think all of these will be successful. So therefore, on a risk-adjusted basis sort of look at supply, we see that there is a very strong market short on the horizon. Now -- and there's already a market short in our dialogues with many of our customers, they are getting orders canceled or they are getting double-digit price increases twice in 2 months and so on. And another sort of thing we're observing is that the EV market is crowding out the ESS market.

So having a tailor-made solution for ESS is actually very welcome in the market today. And therefore, there is a lot of interest even after our initial sort of year where it's sort of really marketing our solutions to that. So the way we're thinking about this with that backdrop, Greg, is we are seeking to allocate about 50% of the volume in any given facility to sort of 5-year long-term contracts. And the reason why we're doing that is to ensure that we have a strong sort of bankable cash flow coming in from a creditworthy partner. And then we are reserving 50% of the remaining volume for merchant sales, because we do believe that having spare capacity going into this market short environment is probably the most sensible commercial play as a battery cell producer at the same time having visibility to sufficient amount of cash flow so that you can get favorable project financing in the making. And all of that is, of course, iterative processes that we're in at the moment. So as we've previously indicated, we are well north of 100 gigawatt hours in initial off-take agreements.

Giga Arctic will probably produce in the order of 100 gigawatt hours by 2030 when we sort of take ramp-up and yield and uptime, et cetera, into consideration. So what that means is that we already can visualize or think about having half of the off-take volumes that we have contracted so far dedicated to Giga Arctic and the remainder in a way, dedicated to the next facility. So I hope that sort of gives you a flavor of where we are thinking about this. This is obviously not something that is carbon stone to 100%. We might go a little bit higher on off-take commitments in one facility and maybe a little bit lower in another, as we're sort of progressing on our project financing efforts. But by and large, I would say that we have sufficient coverage for Giga Arctic, and we're starting to have sufficient coverage for the next facility. So hopefully, that gives you some color as to how we're thinking about this and why we are ready to come out with reasonably bold and bullish statements around Giga America at this time.

And then I did want to follow up on the, I guess, they call it the Inflation Reduction Act. Clearly, that's very granular. And I get this is more of just a catch up to what's already been happening in Europe. Is there any way to kind of, I don't know, try to quantify what -- how this levels the plain field for battery cell pack production in the U.S. versus Europe? I mean, it seems like based on what we're tracking the Europe is still much, much more attractive incentives. Any way to kind of say, yes, I guess kind of how this backs up versus what's already in various pockets of Europe?

So Greg, I think it's a little bit too early for us to sort of have a very strong view as to how much more or less or equally attractive this is relative to different incentive schemes in Europe. As you know, there is something called IPCEI in Europe, which is International Projects of Common European Interest, which is this broad European incentive program to stimulate among other things, in battery production. This is also something that Norway is going to be part of. But then, of course, you have favorable government guarantees, you have direct lending programs. You have ECAs backing up different solutions. You have grants, both from the European Union and from local governments, all within the European competitive sort of framework.

So it's a little bit too early to say whether the Inflation Reduction Act is materially better or at par with what we see in Europe in general and in Norway in particular. What I can say is that when we actually saw the bill come out and we saw the details of it, we were very encouraged. So this is obviously the driving force behind us now accelerating our plans and efforts in the U.S. And as we move forward and we start engaging on specific programs and specific discussions and will be let's say more intelligent in terms of how to inform our investors about how we view this. But clearly, this is positive. Clearly, this increased interest in capacity build out in the U.S., and we will be at the forefront of that for sure.

As there are no additional questions waiting at this time, I'd like to hand back over to the management team for closing remarks.

Alright. Thank you, Candice, and thank you, everyone, for your participation this morning and your interest in the company. We look forward to seeing everybody out on the road over the next several weeks, and we'll catch up with you soon. This will conclude the call.