Li-Cycle Holdings Corp (LICY) 2022 Q2 法說會逐字稿

Good day. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2022 Li-Cycle Holdings Call and Webcast. (Operator Instructions) After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Nahla Azmy, Head of Investor Relations. Please go ahead.

Thank you, Britney. Good morning, and thank you, everyone, for joining us today for Li-Cycle's review of our second quarter 2022 results ended April 30. We will start today with formal remarks from Ajay Kochhar, Co-Founder, President and Chief Executive Officer; Tim Johnston, Co-Founder and Executive Chairman; and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session. Ahead of this call, Li-Cycle issued a press release and a presentation, which can be found on the Investor Relations section of our website at investors.li-cycle.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. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect including because of factors discussed in today's press releases, during this conference call and in our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.li-cycle.com. We do not undertake any duty to update any forward-looking statements, whether written or oral, made during this call or from time to time to reflect new information, future events or otherwise, except as required.

With that, I'm pleased to turn the call to Ajay.

Thank you, Nahla, and good morning. We are pleased you could join us to discuss the significant achievements during the past quarter. Strategically, we are positioning Li-Cycle's Spoke & Hub integrated network as a long-term preferred recycling partner and supplier of lithium-ion battery materials, particularly in North America and Europe.

Beginning on Slide 3, with highlights which Tim, Debbie and I will cover in more detail later. On the commercial front, we completed milestone, long-term commercial contracts with Glencore, LG Chem and LG Energy Solution, together with LG, leading participants in the global battery supply chain. On operational level, we operationalized the Arizona Spoke and made advancements on the construction of the Rochester Hub. And on the financial front, we further strengthened our balance sheet through a total of $250 million in funding from the Glencore note and the LG investment.

Before reviewing our progress in executing on our commercial strategy, on Slides 4 through 6, I would address market trends, including the supply and demand fundamentals for critical battery materials and the growing need for domestic sources of supply.

Turning to Slide 4. Secular trends and geopolitical concerns are accelerating the movement to attain energy independence and to address global climate change, favoring faster electrification of our transportation system. As a result, global incumbents and emerging automotive OEMs are accelerating their production goals for electric vehicles, and many have announced they are phasing out internal combustion engine vehicles. On a global scale, this trend is driving a projected growing deficit in the supply of critical battery materials this decade.

The pace of development of supply is being outstripped by the continued and rapid growth of EV demand as an accelerating secular trend in this industry. This underscores the importance of incorporating recycled metals into the supply chain to help augment supply and increasingly localized production. Our total addressable market or TAM for lithium-ion batteries available for recycling continues to grow, even from our last quarter update. The TAM for North America has increased by more than 170% since year-end 2021 levels and Europe by more than 330% for a combined increase for both regions of more than 200%. This meaningful step change is largely driven by increased battery manufacturer mega factory investments to keep pace with EV OEM anticipated demand.

Turning to Slide 5. Not only our key battery metals estimated to be in a growing supply deficit, but importantly, the top 3 regions that control primary and post-processing supply sources for these battery materials are outside of North America and Europe. Given these dynamics, the need to accelerate the domestic development of the battery supply chain to keep pace for demand is abundantly clear.

Turning to Slide 6. A number of new public policy programs in the U.S. support the development of domestic supply sources from these critical materials. Here, we highlight a couple of significant government programs designed to provide financial support to facilitate domestic expansion of the battery supply infrastructure, essentially deeming this to be a critical strategic industry.

Now let's shift to Li-Cycle's commercial strategy and our recently completed global partnerships, bolstering our ability to capitalize on these market trends and accelerating our path to sustainable regional closed loop battery supply chains.

Turning to Slide 7. For high-level background on our new partners in this critical and growing industry. On the far left, Glencore is a leading provider of primary metals for lithium-ion batteries in electric vehicles. Importantly, they are a top producer of cobalt and a top 3 producer of Class 1 nickel globally. For context, Class 1 nickel is used in lithium-ion battery production. On the far right, LG Chem is a leading global chemical company with expertise in active battery materials manufacturing. LG Energy Solutions, with battery production sites in the U.S., Poland, South Korea and China is one of the largest global lithium-ion battery manufacturers for electric vehicles. LG has announced multibillion-dollar investment commitments to grow the battery business with plans to establish robust battery cell production capacity in North America and Europe.

Both LG and Glencore has designated Li-Cycle as a preferred recycling partner. Li-Cycle's delivery, a closed loop solution for securing LG's growing battery material supply needs in North America and Glencore has the ability to combine its global network as a leading primary producer of recycled metals with Li-Cycle's recycling capabilities. These partnerships are expected to accelerate a path to the circular economy for lithium-ion batteries in North America and Europe. With these strategic partners, Li-Cycle has the opportunity to bring in direct and indirect vertical integrated solution between broader and more diversified global customer base within the battery supply chain universe.

Turning to Slide 8. The recently completed long-term intake and off-take commercial agreements with Glencore and LG are expected to deliver significant economic value to Li-Cycle. These new partnerships complement the existing Li-Cycle commercial agreements such as with tractors. I'll provide more color on the Glencore agreements first. These are long-term agreements with a 10-year-plus term beginning August 1 of this year. Importantly, these agreements enable us to jointly develop the opportunities for our spokes, secure incremental black mass supply to our Hubs and optimizing the black mass sales, commercials, expand the market for our battery grade end products produced by Hubs, secured off-take for the main byproducts produced at our Spoke & Hub network; and finally, obtaining secured supply of sulfuric acid, one of the key [ingredients] for our Hubs.

Next, regarding LG. We completed long-term intake and off-take contracts for battery materials in North America. LG Energy Solutions will supply Li-Cycle with lithium-ion battery scrap for recycling and our Spokes and Li-Cycle will supply LG with off-take from the Rochester Hub.

Turning to Slide 9 to bring this all together. Partnering with Glencore as a leading primary metal source and LG as a leading battery manufacturing source, Li-Cycle's Spoke & Hub Network is well positioned at the intersection of the battery material supply chain. As depicted here, Metal mining is currently the primary source of battery materials to supply cell in auto OEMs. As noted earlier, those sources are largely outside of North America and Europe and are expected to be in supply deficit over time. Through a partnership, combining Glencore's global primary mining network and Li-Cycle's localized recycled sources, we are providing an integrated battery materials platform for global customers, predominantly focused on North America and Europe.

Battery manufacturing is a key source for recycling feedstock to provide the secondary sources of battery-grade materials. Our contractual arrangements with LG provide Li-Cycle with a nickel-based feedstock from recycling, patented battery-grade nickel sulphate for their battery cell production, hence the term closing the supply chain loop.

In closing, with respect to our commercial execution. With the strategic partnerships we've announced today, I couldn't be more excited about our growth prospects with our differentiated recycling solution and unique position in the value chain. Our focus continues to be to expand and operationalize our Spoke & Hub Network to meet this increasing market demand. Now I'll turn it over to Tim to provide an operational review.

Thank you, Ajay. Beginning on Slides 10 and 11, I'll provide an update on our Spoke & Hub Network. As we discussed on prior earnings calls, in order to be a reliable secondary source of battery-grade materials, it is important to secure a sustainable intake of battery materials for recycling. To facilitate this, we are locating our Spokes close to battery and automotive manufacturers, minimizing transportation risks and costs and our innovative process is designed to be chemistry and form factor agnostic. In addition, we are positioning the Spoke network to capture growing volumes on manufacturing scrap to provide a strong base load of materials for our operations. Supplementing this will be end-of-life battery volumes, which should continue to run steadily in the coming decade.

As you can see on Slide 10, we now have 3 Spokes in operation, including the Arizona Spoke, which became operational at the end of April. The Arizona Spoke is the next generation of our Spoke innovation in terms of scale and processing capability. It is double the capacity of the earlier Spokes and has first of its kind capability for processing 4 electric vehicle battery packs without having to discharge or dismantle. Arizona is quickly being followed by the Alabama Spoke, built to the same specification. This Spoke is coming online on schedule following the build and process learnings from Arizona. These Spoke facilities have been constructed with our proven modular approach at Li-Cycle's Ontario fabrication site for the faster and more cost-effective deployment.

As we optimize our Spokes as a network of facilities, this second-generation innovation is expected to drive a step change in productivity. This will allow us to direct battery feedstock to specific Spoke sites for optimal processing based on feed fit. For example, manufacturing scrap and consumer electronic derived batteries can be flexibly processed at all Spoke sites. For EV battery packs processed through our first generation of Spoke sites such as Ontario and New York require manual disassembly by trained technicians before being processed. With expanded capacity and processing capability in Arizona and Alabama, full EV battery packs can be processed without dismantling, driving to improve efficiency. This combination of different processing sites and capabilities allow Li-Cycle to provide a fit for purpose solution for all lithium-ion battery types and form factors, driving to enhance safety and economics.

A final note. With the upcoming commissioning of the Alabama Spoke, we continue to expect the second half acceleration through our black mass [tighter] production for fiscal year 2022 to be between 6,500 to 7,500 tonnes, which is more than 3x the level of last year.

Turning to Slide 11 for an update on the Rochester Hub. As we mentioned in the first quarter, we obtained a key environmental comment for the Rochester Hub, enabling us to move forward with the next stage of project development and construction. During this past quarter, we continued to make progress on several fronts. Specifically, we have locked in the delivery schedule and pricing for the majority of our long lead equipment and purchasing of the construction materials has progressed, providing enhanced confidence in material pricing.

We continue to monitor and manage material and labor costs and potential supply chain issues to maintain the stated capital cost target. We continue to expect commissioning as planned in 2023. In the coming quarters, we look forward to sharing further exciting construction developments of the Rochester Hub.

Turning to Slide 12 for an update on our European buildout. Similar to North America development strategy, Li-Cycle is targeting Spoke locations in close proximity from battery and electric vehicle manufacturers. Our development of the Norway and German Spokes continues and both are expected to come online in 2023, with a total processing capacity of 20,000 tonnes per year of lithium-ion batteries.

Summing it all up on Slide 13. Here, we depict the current portfolio of Spoke & Hub projects in North America and Europe that are expected to come online in 2022 and 2023. I would like to leave you with these key thoughts that underpin our competitive advantages and will drive continued successful rollout of our Spoke & Hub Network strategy.

One, we continue to demonstrate the flexibility of our innovative, patent-protected and time-tested processing technology that is chemistry and form factor-agnostic with high recovery rates. Two, our innovative construction technology is scalable and uses standard equipment, allowing for expedited deployment in response to customer demand. Three, our commercial partnerships are diversified with leading local participants in the battery supply chain, providing optionality for capturing market growth. By executing efficiently and growing our spoke and hub integrated network, we anticipate continued commercial expansion, serving the market as a key regional partner for closing the battery material supply loop.

That concludes my formal remarks. Debbie will now provide a financial update.

Thank you, Tim, and good morning, everyone. If I could turn your attention to Slide 14 for a review of the second quarter results ended April 30, 2022. Revenues increased to $8.7 million compared to $300,000 in the same quarter last year, driven by increases in product sales volume and metal base prices. Revenue reflected both in quarter product sales of $4.3 million, adjustment of $4 million relating to prior period sales.

By way of background, aligning with our contracts and IFRS reporting requirements, we recognize revenues on product sales at the point of delivery to our customers, based on black mass sales volume and prevailing market metal prices. Our customers take title of the materials, and we retain pricing exposure until the related receivables is released asset. As such, both our revenue and receivable balances are remeasured at HP [and for] movements in metal prices between the initial recognition of the sales and the final settlement of the receivable. Hence, the fair market value adjustment in any reported period.

Black mass produced in the quarter was more than 2x higher than the same quarter last year and slightly higher sequentially. A significant portion of the battery fleet supply for our Spokes in the second quarter with large formats in nature, for example, from energy storage systems and a recent EV recall.

As Tim noted, our Arizona Spoke has a first-of-its-kind capability to process these larger packs without discharge or dismantling. In relation to this, we made a deliberate choice to build inventory of this large-format battery feed supply during the quarter for optimal processing at our Arizona facility. As we expand our sources of supply and grow our Spoke Network, we will increasingly be able to optimize recovery rates and capacity utilization at our facility by matching our fleet with the best suited Spoke for processing.

Operating expenses for the quarter increased to $30 million compared to $5.6 million during the same period last year, reflecting the ongoing expansion of operations in North America and the early build-out in Europe. The increase was primarily related to personnel costs for operational, corporate, commercial and engineering resources as well as public company comps. In addition, this reflected the higher costs from raw materials and supplies attributable to our increased black mass production. We are being deliberate and balanced in our operating spend, investing in corporate infrastructure that will support our expanded network in 2023 that will drive significant revenues and cash flow economics in years to come.

Adjusted EBITDA loss was approximately $19 million compared to $5 million for the same period last year. This reflects increased costs associated with the plant expansion of our Spoke & Hub Network in North America and Europe as well as becoming a public company, which we did not incur the same last year, given the timing of our listing in August 2021. I note that the quarter included stock-based compensation of $4.5 million versus $300,000 this time last year. This noncash cost is primarily associated with the continued build-out of Li-Cycle's operational, technical and corporate [mention] as the company progresses towards commissioning of the Rochester Hub.

Moving to Slide 15 to cover the balance sheet. At April end, we had more than $509 million of cash on hand. Subsequently, in May and June, we received a combined total of $250 million in investment proceeds from LG and Glencore, bringing our pro forma cash to approximately $760 million. As a result, we have sufficient liquidity for our capital and operating needs to fund the current pipeline of projects in development. Having achieved this important strategic and financing milestone, we are continuing to be methodical in evaluating multiple sources of capital to optimize the balance sheet and provide future flexibility. As I mentioned before, these include debt-based financing alternatives such as traditional corporate debt, project financing and government-related funding.

Moving to Slide 16, I'll discuss our longer-term financing strategy. During our first quarter earnings call, I indicated that our financing plan will follow a modular step-based approach to growing our business. I would like to add additional context to what we mean by that. The current network consists a total of 7 Spokes in North America and Europe and 1 Hub in North America targeted to be operational in 2023. This phase of our goal is fully funded and is expected to lead to sustainable cash flows, particularly following commissioning of our Rochester Hub in 2023.

As for the future growth prospects, we anticipate a modular approach to capital investment and associated operating expenses. Hand in hand with this, we expect to take a modular rollout approach to the funding requirements that will support these growth prospects. To reiterate, there is a clear delineation between current project pipeline needs, which are fully funded and incremental growth, which is optional and the related financing environment. The foundational growth I've seen through our current Spoke & Hub pipeline is an important part of our operating journey. Executing on our operating plan will expand the breadth of financing returns available to us, enable us to take advantage of additional growth opportunities while optimizing our future cost of capital.

Turning to Slide 17, I would like to close with a recap. The market is anticipated to have a global supply deficit or critical battery materials in the coming decades. This is driving growing momentum for localized or domestic sources of production, accelerating growth in North America and Europe. Li-Cycle is strategically anchoring its Spoke & Hub Network to customer demand. We have executed most of commercial agreements with key strategic global partners to further enhance our leading position as a preferred partner for recycling and resource recovery of critical battery materials in North America and Europe. And we are fully funded with cash on hand that includes both the capital and operating needs to complete the portfolio of Spoke & Hub Network projects and developments.

That concludes our formal remarks. Operator, we are ready to take questions.

(Operator Instructions) We will take our first question from Robin Fiedler with BMO Capital Markets.

I wanted to unpack the quarter a bit, really 3three quick but key questions. So obviously, the black mass production surprisingly didn't improve much quarter-over-quarter. Revenue obviously more than doubled. I guess I'm a little bit surprised, I guess, the Kingston spoke still experiencing some issues there, maybe talk about that a bit? And then obviously, you're benefiting from the just stronger battery metal prices overall. But what was the black mass price specifically in the quarter?

And then I'm trying to better understand like this fair market adjustment. Maybe you can help us understand how to think about that in the context of like Q1 and Q2? Was there some -- like how should we think about the shift there? Like was some of this revenue, obviously, which was really strong despite like the production issues seemingly still I guess, some of that borrowed from Q1 technically, like maybe just trying to figure out how to model that a bit better going forward?

Yes. Robin, it's Ajay. So -- and we will split it into two. So Tim can cover the production part and Debbie will speak about financial parts of the team.

Okay. Perfect. And Robin, so to answer your question in relation to production, one of the things that we've been guiding to is the weighting of the second half of the year in relation to production. So what we're expecting is now Arizona is ramping up and Alabama is due to come online shortly. This will be a significant step change in production.

I would also highlight that what we've been doing is focusing on inventory, and I'm talking about battery feed inventory that relates to the larger format materials. So things like energy storage systems, and we've had a recent EV report that we've been working through. Rochester and Kingston are really our first-generation plants, which are better suited for processing small format material. And so what we expect to report is now that we're increasing the capability and capacity of the network of Spoke facilities that we'll have the ability to direct the top optimal site in order to improve both throughput but also recoveries associated with the different types of battery feeds.

That's a long way of saying (inaudible) and Kingston, specifically. Kingston has been running a lot of large format feeds, which in the future would be directed to one of our newer format plants, which will have increased ability to process that type of material, and will optimize our Kingston and Rochester to focus on small format materials, so a consumer electric dry batteries and manufacturing scrap in order to pass a further increase in (inaudible). No significant impairments to production, more focused on optimizing around our battery feed times.

And then maybe Debbie can tackle the financial part of your question.

Robin, so I will give you some descriptions and then you tell me some objection, your issue. Again, I gave a little bit of an outline in my formal remarks, (inaudible) of operating leases. So let me just kind of walk through that a little bit for a minute and to keep that helpful.

So in any (inaudible) revenue, we would say that based on current market prices. And then each period as recall, will require -- if that revenue hasn't been settled, i.e., if we haven't received the receivable balance (inaudible) of that revenue. Then we remeasure both the revenue and the (inaudible) growth out to the market prices (inaudible) and that's its fair market value impact.

So you see in our disclosures this quarter, that actually pulls all that information together into one spot in our financial statements. It is in our financial statements before the (inaudible), we had (inaudible) following impact, so I've now given you a little table of (inaudible) financial statement (inaudible) with the revenue out by the value of the items that were sold in the period. And then it's very much the value of the previous deals (inaudible).

So in this quarter, our revenue (inaudible) $4.2 million and then fair market value for our (inaudible) is $4 million for our (inaudible).

Yes. Just flipping out on, I think, Page 14, and that's (inaudible) remark, that's where we actually provide a breakdown within the actual charge itself on the revenue. And then as Debbie mentioned (inaudible).

Okay. And just a follow-up...

I'm sorry (inaudible). I think it's really helpful just to reiterate what the (inaudible) said. So black mass produced, you would have expected a bump in that based on our remarks from Q1. But that's an intentional choice spread to hold the leading product and produce it in the right facility, versus putting it through at a higher cost and less optimally in one of our other sites. So we brought Arizona online towards the quarter. We do have to process that inventory to either Rochester or Ontario, but that was not the best economic position. So we chose to move the (inaudible) and we will profit compared to Arizona and ultimately also (inaudible).

Okay. Sounds good. Maybe we can chat a bit more about that in a follow-up call. But just if I could sneak a second question in. It's been a couple of quarters since you guys have actually specified what you used to call like a 2025 network targets, I guess, like the next leg of growth. It seems like there's a bit more prudence around that now, somewhat understandably so. But it almost sounded like that stage is even more optional now. I think, Debbie, you might have actually used that term specifically.

So maybe if you're able to provide a bit more specificity on how you're thinking about the next leg of growth in terms of timelines and then the size of those plans, kind of seems like the old 2025 targets are unlikely at this stage?

I can start, Robin and then maybe Debbie or Tim can add. So yes, I think there are 2 parts to that. The first part is, I guess, elucidating how we think about financial investment decisions or FID, as part of our business. And that was really the purpose of Page 16 and when Debbie was talking through that. So on the one hand, we have a current network in development or operating today, which is the 7 Spoke and 1 hub that is coming. And as a first step, I think of it as a set of stairs, right? So the first set of the stairs that -- on that path and then on its own can be providing sustainable cash flows as Debbie talked about. So that's the one half of the equation when it comes to capital allocation and how we think about what's been approved per se from a financial investment decision.

The other part of it is, and to your question is, okay, what's happening in the market and how do we -- our customers, how do we pursue [replying] to that. And you heard it in my remarks, there has been no slowdown in the pace of development of our customers. In fact, it just continues to increase at a blazing pace. So on the other hand, we have ample opportunity. And for us, it's really going to be a decision of scale, siting and continue to work through those work streams, but really it becomes firm on that financial investment position. We may (inaudible) a large part of that and one of the options in there (inaudible) financing, right? So we just really wanted to delineate between what is accrued and need versus the incremental growth that we take advantage.

(inaudible) comments set there, seeing that the significant dollars to fund the business through the purpose of my comments (inaudible) between what we need in this current network, it is actually going to be a very vital business. And then what we believe the growth opportunities from that.

We will take our next question from P.J. Juvekar with Citi.

This is Patrick Cunningham on for P.J. I had a question on the Rochester Hub. So what are your current expectations for start of production? And what can we expect that ramp-up to look like? And if there's anything -- any uncertainty there? What are the sort of drivers of the moving start date? And is it equipment backlog? Is it hiring? Just any more detail on that would be appreciated.

I think, Patrick, I'll turn over to Tim and he can address it.

Yes. No problem. Thank you for your question, Patrick. So when it comes to the start-up of the Rochester Hub, we're still guiding to completion and start-up in 2023. That's what we're working towards. That's what we believe that we can achieve. Of course, we are remaining focused on the challenges in the world today in relation to, as you alluded to, labor shortages, material costs, right, et cetera.

How we've been able to address that and we talked about this on the last earnings call as well, we've continued on this path, it is to focus on early procurement wherever we can. And so as I said in my remarks, we procured the majority of the long lead mechanical equipment. We've also managed to progress bulk material purchasing over the last quarter. Now why is this important? Because Patrick, this really drives the schedule. And so we're less, I would say, concerned about material cost growth and more focused on making sure we have those components and materials available for when they're needed.

Our attention now is really turning to focus on the stocking requirements to the construction, and we're ramping up that team as we speak. But at this point in time, we're still guiding completion in 2023 as originally planned.

In terms of ramp up beyond that, Patrick, we haven't provided any public guidance in relation to this. I will just highlight that this is a [hydrometallurgical] plant using standard processing equipment is what I would consider industry normal for this type of application. And so I think that there's lots of great examples of, let's say, low temperature atmospheric operations and their ability to ramp up relatively.

Great. And I just had a second -- I had a follow-up. And I saw as part of the Glencore agreement, it looks like there are some arrangements not only for -- on the supply side, but for offtake of black mass and end products. Is this going to be a substantially large offtake partner? And are these volumes contracted to the current tracks agreement? Or does this involve some sort of other agreement?

Yes. Thanks, Patrick, and I can address that. I mean maybe 2 part for the answer, one, taking a step back, I mean, this is a very transformative deal for the company and we announced this in closing about 2 weeks ago, we actually used today to talk about the strategic aspects. And (inaudible) question that we take opportunity to answer your question.

Look, I mean, we all know that raw materials critical materials are the linchpin and will be the rate limiting step to be frank for electrification. And we see that. Now some of the recycling space will say -- or recycling consult each and every day. Of course, recycling is a very important and critical aspect is (inaudible), and we're already today starting to see that as part of our business. But we have to get there. And primary supply is a very important part of that.

So this is what we've announced is a holistic global, very strategic agreement with Glencore. Glencore is the top producer of cobalt, the top producer -- they're a top 3 producer of Class 1 nickel, which is the nickel grade that goes into lithium-ion battery material. So look, as time will go on, there'll be more that will come through as we continue to develop with Glencore, obviously extremely excited for the business, highly validating and a great underpinning strategic partnership with the business.

On your question, so just to describe maybe there were some questions about how this interplays between [TrakSYS] and Glencore. So to be clear, TrakSYS (inaudible) agreement and they continue to be great partners, exists for the Rochester hub, which is for the 100% offtake of lithium, nickel cobalt, magnesium ,graphite. And then in North America today for any black mass that we do so, that is through TrakSYS as well.

The Glencore agreements are actually outside of that jurisdiction on a longer-term basis. So that pertains to the offtake for any health products, that pertains to the black mass that we might sell. But there are a couple of other very exciting aspects to that, including very quickly byproducts. Our main byproducts have now been fully spoken for by offtake with Glencore, key rating supply, and one of the really exciting parts is working together on feed supply. So Spoke supply as well as black mass throughout. So again, that wasn't really your question, but I just want to take the opportunity to really emphasize how important and exciting this business is.

And we'll take our next question from Brian Dobson with Chardan Capital.

So let's talk about Europe a little bit, I guess. Given geopolitical issues there, have you found local governments are becoming more accommodative in terms of approvals in order to secure local battery recycling capabilities?

Yes. Thanks, Brian. Thanks for joining. I'll turn over to Tim, he has some comments.

And so I guess there's 2 charter trends that we're seeing around the world and including Europe. One is of course, increased desire to regionalize material supply networks. And we've seen an increased focus on this, and that's part of our strategy for building out in Europe is to be able to support customers locally close to where the materials are generated, and we'll continue to update the market on that.

The other thing that's happening at the same time is increased prudence around environmental regulations and sustainability, which is actually working in Li-Cycle's favor. So it's one of the benefits, obviously, about processing technology is around minimal environmental footprint as it relates to waste water, air emissions, et cetera. And so what we're seeing is strong support from government bodies, who are looking to both regionalize supply chains as well as customers of interregional supply chains. That's also coincided with increased focus on how we're actually doing the work. And so we see both these things has been favorable to Li-Cycle.

And then my follow-up question has to do with expenses. Do you think you could give us a little bit of color on the expected cost cadence for the remainder of the year or certain expense line items you might want to call out as remaining elevated or having the potential to grow, given the inflationary environment?

Yes. Thanks, Brian. I think Debbie can answer that. Maybe just to clarify that you're really asking around how do you -- maybe expect so far to [rates pick up] the year.

Brian, it's Debbie here. So I think none of what you thought, I think we're beginning to hit [the] starting point. So I think [that] what you've brought to your benefit is our Q1 and our Q2. And I think there is a recently good runway forming there that's indicative about what our year will look like.

The one thing that I would say that I had in my remarks is just to take a [ton] of the fact that there is like $4.5 million of share-based comp, which is noncash in the quarter. And we would expect that to be similar when we (inaudible).

We will take our next question from Ben Kallo with Baird.

Maybe first, just going back to Europe. Could you talk to us about the Spokes there? Are they -- the newer version, is it similar to Arizona and Alabama?

Yes. Tim, can answer that.

Yes, no problem. So Ben -- so you're right. So the 2 Spokes that we've announced, one in Norway, one in Germany are both to the same design as the Arizona and Alabama Spoke. So what we are forecasting is that there will be up to [10,000 tonnes] per year of processing capacity and be able to process everything, up to including full electric vehicle battery parts. I should note that we are expecting to commission both these facilities by next tear.

And then could you just talk to us more about the other change that was made? Because that's good news for us, but to be able to process without the disassembly when that was developed and how much has been tested there?

Absolutely. And so this is -- and I have to calm myself a little bit just because it is a very exciting development for the company. I actually believe this is a -- for us, this client process that we've been able to successfully demonstrate now. So it's basically the same fundamental process. It's still the same submerged shredding process. But if you think about what we were trying to do previously is in a single stage, we're going for whatever form factor of material we were feeding.

So you can imagine and I'll try and talk to illustrate here a little bit to help people understand. But if you can imagine a module that is sort of 3 feet long, 2 feet wide and 6 to 10 inches tall, and now we're taking that one single piece of material, and we're breaking it down into the material that's well less than 1 inch in size, that's a big step change in terms of size reduction.

That's not how we would do it in traditional mining applications, for example. So what we've done using that same submerged process is absolutely going to multiple in line size reduction steps. So we actually can go from these very large format battery packs. Now we can take everything out to we've said multiple funds, for electric vehicle battery packs. This process was designed around the concept that packs are essentially getting larger. They're getting more integrated into the vehicles in terms of we've seen things like structural parts being out, for example, which make it nearly impossible to disassemble.

So we can now take everything up to those 4 packs subprimes of vehicles, et cetera, and then process it through the same process but through multiple stages in mining series, in order to go from that large format, the same finished size that we're chasing, whilst we are liberating the black mass and doing all the other important things that we do as part of our core process.

And then my last one, have you seen any change in your offtake agreements from cell producers or battery producers, in terms of either length of contract or the details of the contract? How much you have to pay for the offtake or anything like that?

I'll take that. Yes. So I think it's interesting. I can say I remind (inaudible) business with a very common that we would sign a couple of year contracts with the different master services agreement. And we still do that in that form. But I think what's interesting is the movement towards longer term. And our LG agreement, as an example, is a good case of that. So the intake agreement in that case is actually the same term as the offtake, which is 10 years. So that's rewinding a couple years ago, wouldn't have been the case. So that's very encouraging. And obviously, for us, really helps with planning (inaudible). Vis-a-vis pricing and what's happening in the market yes, very different segments and different things are priced in different ways.

So for example, manufacturing scrap has tied to be contained materials or other materials or other types of batteries may not may not, for it's [more of a service] it's more of a service. So much the same, I think, in terms of the way our business has continued or we continue to see multiple market segments and multiple pricing purchases.

We will take our next question from Jeff Osborne with Cowen & Co.

A couple of questions on my side. I might have missed it, but did you give the average price of black mass in the quarter?

Jeff. Debbie, can you take that.

Not yet, Jeff, we actually don't disclose our (inaudible) sold in the quarter, but I think I can tell you that this -- our tonnes sold is greater than the tonnes produce, the gross tonnes produced. And we did actually some inventory as we would assume from Q2, we get actually one side and you said we had (inaudible) tonnes sold was greater than tonnes produced in the quarter. And I think what we can do is use that disclosure in Note 14 now. And if you're calculating per tonne numbers, I would actually use the revenue in the period number, so the number excluding (inaudible) market following adjustment and that was (inaudible).

Got it. And when you answered the question on fair market value, your line -- the speaker phone was tough to hear, but given the fair market value adjustments or half year revenue, I just want to understand that sector better. So can you give us a sense of how many metric tons were subject to fair market value adjustments? And I think in your disclosure, you talked about just under 2,600 metric tons that are subject to future fair value pricing adjustments as of April 30. When would you expect those adjustments to flow through the P&L?

So Jeff when we (inaudible) because I don't have a separation for you in terms of how many tonnes are associated with fair market value. But what happens is when we book the revenue, there's a long lead time. So actually (inaudible) And so we are subject to repricing in that (inaudible) and that when (inaudible) can be anything from about 9 to 12 months.

Got it. And then maybe the last one is just there was a lot of discussion of larger form factors, which is great. I wanted to understand, are you seeing a more pronounced mix shift in scrap relative to the expectations at the time of the SPAC merger in regards to scrap versus, say, recalls?

No, I would say that it's still roughly online, we were always sort of forecasting a reduction in total consumer electronic batteries as a proportion of our overall feed mix. And I'd say that's been consistent. We've seen -- we're continuing to see more scrap come on the market, and you can follow the I guess, the battery OEMs and what they're doing to give you an idea of how much scrap is coming to the market. We are seeing that to continue to accelerate, particularly in the early days of these new cell manufacturing plants coming online.

I'd say the one thing that we do forecast as much was just in relation to repo applications. I would also say that we've seen more energy storage system retooling in the last 6 months than what we would have originally forecast 12 months ago. This is all what we consider outsized relative to what we (inaudible) previously.

There appears to be no questions in the queue. I will turn the call back over to Ajay for his closing remarks.

Thank you. In closing, Li-Cycle continues to accelerate its position as a leading preferred recycling and resource recovery partner to global strategic partnerships in battery supply chain. We have sufficient liquidity for our capital and operating needs to fund the current pipeline of projects in development of (inaudible). And finally, our Spoke & Hub Technologies integrated network is uniquely positioned to capitalize on accelerating electrification trends that will deliver significant earnings and cash flow in the years to come.

So thank you. We appreciate your time and interest in Li-Cycle, and we look forward to continuing to update you regarding our ongoing buildout and execution.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.