Livent Corp (LTHM) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to the Third Quarter 2022 Earnings Release Conference Call for Livent Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speaker's presentation, there will be a question and answer period. I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Live Corporation. Mr. Rosen, you may begin.

Thank you, Dennis. Good evening, everyone, and welcome to Livent's Third Quarter 2022 Earnings Call. Joining me today are Paul Graves, President and Chief Executive Officer and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies results, along with our earnings release, can be found in the Investor Relations section of our website. Prepared remarks from today's discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions.

Given the number of participants on the call today, we would request a limit of one question and one follow-up per caller. We will be happy to address any additional questions after the call. Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will include references to various non-GAAP financial metrics. Definitions of these terms as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor Relations website.

And with that, I'll turn the call over to Paul.

Thank you, Dan, and good evening, everyone. Livent had another very strong financial performance in the third quarter as the business continues to achieve record levels of profitability. Q3 adjusted EBITDA of $111 million compared to $15 million one year ago and from $95 million last quarter. In what remains a very strong market, Livent has continued to achieve higher realized prices while also delivering increased volumes to customers in the third quarter.

As we approach year-end, Livent has narrowed the ranges of its full year 2022 financial guidance while increasing projections for adjusted EBITDA at the midpoint. This is underpinned by higher realized pricing in the second half than previously expected. As we will go into in further detail, Livent continues to make considerable progress on its expansion projects and remains on track with all projected time lines and capital plans. Construction of our 5,000 metric ton lithium hydroxide expansion in Bessemer City was completed in the third quarter, and we are now in the early stages of producing and qualifying this product with customers. 2023 will be a landmark year for Livent, as we expect to fully ramp up the Bessemer City hydroxide expansion, complete two phases of lithium carbonate expansion in Argentina, totaling 20,000 metric tons in nameplate capacity and add a new 15,000 metric ton hydroxide facility in China, all by year-end.

Given the time required to ramp up the new Argentina expansions, Livent expects to produce roughly 6,000 metric tons of incremental LCE volume in 2023 or roughly 25% annual increase starting in the second quarter, and we expect to further increase our production in 2024 and the years to follow. 2023 will also be a pivotal year for the Nemaska project as it begins construction and critical decisions regarding project financing and commercial pathways are made and executed on. All of these capacity expansion efforts continue to progress as expected and as previously communicated.

I will now turn the call over to Gilberto to discuss our third quarter performance and our updated 2022 financial guidance.

Thanks, Paul, and good evening, everyone. Turning to Slide 4. Livent reported third quarter revenue of $232 million, adjusted EBITDA of $111 million and adjusted earnings of $0.41 per diluted share. This was another record quarterly financial performance for Livent as we continue to execute well operationally in a strong market environment. Versus the prior quarter, revenue was up 6% with higher total LCE volumes sold complemented by slightly higher realized prices and a favorable product mix. Third quarter adjusted EBITDA was 17% higher than the prior quarter and over 7x higher than the prior year. This was due to continued strong pricing across all products and our ability to take advantage of the favorable market conditions.

Additionally, we saw a small improvement in sequential costs as we saw the bulk of our remaining higher-cost third-party carbonate material from inventory in the second quarter. There was also an FX benefit to adjusted EBITDA as a result of the strengthening of the U.S. dollar versus some of our foreign-denominated costs. From a balance sheet perspective, we finished the quarter with $212 million of cash, inclusive of the receipt of $198 million prepayment from General Motors. As a reminder, this prepayment is related to a six-year battery-grade lithium hydroxide supply agreement beginning 2025, which was announced by Livent and GM last quarter.

During Q3, Livent also announced the renewal of its revolving credit facility for five years through 2027, while [upside] by $100 million. As a result, and due to continued strong cash generation, Livent's now $500 million facility remained undrawn at quarter end. As we look to the remainder of 2022, you will see that Livent has updated its full year guidance, as shown on Slide 5. We have narrowed the ranges of our guidance while increasing the midpoint of our projected results for adjusted EBITDA by $10 million.

For the full year 2022, Livent now projects revenue to be in the range of $815 million to $845 million in adjusted EBITDA to be in the range of $350 million to $370 million. This improvement is largely underpinned by expectations for slightly higher realized pricing. Leader demand has been exceptionally strong throughout this year and published leasing prices in all forms have continued to move higher, reflecting very tight market conditions. Livent has been able to take advantage of this by realizing higher prices on the subset of its volumes that are exposed to market prices. We are confident in this environment not changing for the rest of the year and Livent will continue to take an advantage of this. However, due to customer mix, we will have a larger portion of sold volumes in the fourth quarter that are contracted at previously set lower fixed price.

As a reminder, we expect 2022 total volumes sold on an LCE basis to be roughly flat versus 2021, as no meaningful volumes from our capacity expansions are expected to be commercially available until 2023. The revised guidance does not assume any change in total volumes compared to our last guidance, although we do expect to sell slightly higher volume sequentially in the fourth quarter. With that said, given some of the regional supply chain disruptions, we continue to see effect in many industries including our own, there is a potential for some year-end volumes to be pushed into the beginning weeks of 2023.

Livent significantly improved profitability and cash flow will be further enhanced by additional production volumes coming online over the next few years. This much improved cash generation provides Livent with ample liquidity to continue advancing where possible, accelerating its expansionary investments. Additionally, we will continue to evaluate other forms of funding, such as the prepayment received from GM that provide additional flexibility and are only available to proven reliable producers such as Livent with credible expansion projects. The focus from customers on securing supply of battery-grade lithium from proven producers remains as strong as ever. Guidance projection for 2020 capital spending of $300 million to $340 million remains unchanged. Our pace of spending picked up in the third quarter, and this will continue in the fourth quarter as we approach commission of our first 10,000 metric ton phase of carbonate expansion in Argentina and reach other key milestones across our projects.

I will now turn the call back to Paul.

Thank you, Gilberto. Turning now to several market observations on Slide 6. Despite some near-term supply chain disruptions, particularly in China, with energy curtailments and zero tolerance COVID-19 policies, lithium demand has continued to be incredibly strong. For the first nine months of 2022, China EV sales reached 4.5 million units. And based on most full year estimates, sales in China will more than double versus 2021. EV battery sales in China show similarly impressive growth, up roughly 245% through Q3 year-to-date versus 2021. And BEV registrations in Europe reached an all-time high in the month of September, a feat that was not expected into the typically higher year-end push in December.

The lithium market has continued to be extremely tight as evidenced by the lack of inventory building throughout the supply chain and the continually higher bid prices set for the limited uncommitted feedstock material that is available. We believe that Australian spodumene-based LCEs, which make up close to half of the total market, did not increase in the third quarter versus the prior quarter, while demand continued to grow. There are a few credible data points to suggest this pressure will abate as we move through the remainder of this year as we go through a period of seasonal slowdown for higher cost Chinese brand producers and as automakers supply chain to ramp up production to meet higher anticipated year-end demand.

It's also hard to make a strong case for a meaningful shift of supply-demand balances as we look out over the foreseeable future. On the supply side, there are several expansions and new projects that are slated to bring incremental volumes to the market over the next few years. But the challenges in doing so only seem to increase. There are multiple reasons for this, ranging from permitting challenges to difficulties in procuring long lead time equipment to difficulties in finding sufficient labor, expansion projects and especially greenfield developments that are becoming more critical and very complex undertakings and are time-intensive by their very nature.

On top of this, the cost of these projects is moving higher due to inflationary pressures, backlogs at the contractors and especially tight light labor markets. And of course, pressure from local communities to participate in these projects means that a longer, more extensive engagement than many new entrants expect is typically required. The complexity integrated lithium production are matched downstream as qualification standards for selling battery grade material and not getting easier, and even incumbent producers such as Livent require time to ramp up new production lines to meet the tightening specifications of customers. None of this is to say that there will not be some supply relief in the coming years or that there is any long-term cost curve out there to justify current market prices. But it's hard to see a probable scenario where the lithium market does not remain structurally tight to varying degrees or one where our industry returns to prior trough pricing levels.

On the other side, it's important to acknowledge just how resilient lithium demand has been. Despite having gone through a global pandemic, where no industry regional consumer was left unaffected, forecasted lithium demand growth has not only not slowed down, but it's exceeded just about every published forecast available. The latest cautionary flags being waived point to fears amongst commentators that high lithium prices will be demand-destructive or to the negative impact of a potential global economic slowdown, especially on consumer demand. While we do not intend to dismiss the likelihood of either, there are still many reasons to remain bullish around lithium. With respect to looking prices from the recent historical highs we've seen over the last few months, there's been little to no evidence of the resulting slowdown in demand. And even at these higher price levels, lithium still represents a relatively low percent of the total cost of an electric vehicle.

Additionally, we've seen many examples of record profitability from consumers of lithium, including major EV and battery producers. A broader or sustained macro weakening could ultimately have an impact on the end consumer. However, there is merit to a recent EV players classification of the industry as being somewhat recession resilient. A critical reason for this is just how strongly the shift to electrification is supported by various regions and governments that continue to reinforce their own low to zero carbon commitments. Policy incentives and emissions regulations remains hugely influential and we've seen stepped up efforts in recent months, particularly in the U.S. As we will discuss, this is the development that we believe is hugely beneficial to Livent and one we have been preparing for.

On Slide 7, I'd like to provide some more Livent specific comments and why the company is so well positioned as we move into 2023. As we said earlier, this is a business that will continue to generate meaningfully higher cash flow. Our growth is supported by being able to sell an incremental 6,000 metric tons of internally produced LCEs in 2023 or a roughly 25% year-over-year increase.

Additionally, a large portion of these incremental volumes are uncommitted today from a pricing standpoint. So if market prices remain resilient in 2022, which is in line with our and apparently most other observers expectations, we would achieve higher average realized prices versus 2022. We're therefore confident that we will generate meaningfully higher cash flow under a wide range of scenarios.

While it may be somewhat premature to speak to cost trends, it is fair to say that we are not projecting a material improvement in raw materials and other input costs in a broad-based high inflationary environment. But with that said, as an integrated producer, our exposure to third-party cost is much lower than those who have to source their lithium inputs externally, and we've shown an ability to pass through certain key cost to customers in 2022.

We're projecting capital spending in 2023 to be higher than 2022. This is not a change to our previous expectations as we continue to execute on our roughly $1 billion in investment plans from 2022 to 2024, excluding Nemaska. We will begin to see the initial benefits of these efforts in early 2023 when we ramp up our first 10,000 metric ton phase of carbonate expansion in Argentina, something we can do relatively quickly given the unique nature of our DLE-based processes.

Given some of the recent announcements in the U.S. from the current administration, I want to spend some time on Slide 8, highlighting Livent's regionalization efforts and why the company is so well positioned to take advantage of a growing government and industry focus on developing a comprehensive North American energy storage supply chain. As mentioned earlier, we completed a 5,000 metric ton battery-grade hydroxide expansion in the third quarter and have begun the process of ramping up production and qualifying with customers. We expect this ramp-up to be complete in the first quarter of 2023, aligning with the completion of our first carbonate expansion in Argentina, which will provide the feedstock for the plant. This additional capacity build on Livent's position as the largest producer of lithium hydroxide in the U.S. on one of the few hydroxide producers outside of China today.

We also want to provide an update on Nemaska as the project has now reached the conclusion of his detailed engineering phase. Having done this work, we remain as committed as ever to help them bring Nemaska into production. We continue to believe that Nemaska will be critical to a future North American supply chain, and we are excited to be a part of it. As a reminder, Nemaska is a fully integrated lithium hydroxide project located in Quebec, Canada, in which Livent is a 50% and equal partner today alongside Investissement, Quebec, an investment group owned by the government of Quebec.

Nemaska plans to have 34,000 metric tons of nameplate capacity of battery-grade lithium hydroxide and we'll have over 30 years of mine life as a very large and cost-competitive asset. It will have access to zero carbon hydroelectric power and will be strategically located across the regional shipping ports at an industrial park being developed in Becancour. This is expected to become a global battery materials hub, and there have already been multiple announcements to produce cathode active materials at the site alongside Nemaska, creating a model for localization that we believe is essential to the sustainable development of our industry.

Total CapEx is currently estimated to be around $1 billion, which is consistent with the capital cost of similar integrated projects being developed globally. Mechanical completions in Nemaska remains on track for the end of 2025 with the first meaningful production beginning in 2026. The team has already begun ordering important long-lead equipment that is required for construction, which we expect to begin in early 2023. With respect to financing, Nemaska is evaluating a number of attractive options. The results in structure is likely to include a combination of third-party debt financing, including potential low-cost government funding, financing or prepayments from future customers and some funding from the existing shareholders that is [IQ] and ourselves. We expect to have more to share on a comprehensive plan in the first half of next year.

It is important to reiterate that 100% of future Nemaska volumes remain uncommitted to customers today. Livent will play a major role in helping Nemaska to identify an appropriate commercial strategy and to manage commercial decision-making. It should come as no surprise that Nemaska is looking for us to help them in these areas, given our expertise in qualifying and selling battery-grade lithium products to leading customers globally and especially in North America. We expect to help Nemaska seek a few initial customers that will be both credible and committed to supporting the North American and especially Quebec-centered localized supply chain.

Livent recently hired a new senior executive who joins us for a major EV-focused OEM and will lead our efforts in Canada as well as our expansion strategy more broadly. Regionalization of supply chains, both for security supply and sustainability reasons has become a growing focus for our industry, recent actions taken by the U.S. government, led by the Inflation Reduction Act have provided commitments and incentives to encourage the strengthening of the domestic energy storage supply chain. Given the importance of domestically mined or processed lithium supply in these efforts, we believe Livent is extremely well positioned to take advantage of a number of additional long-term regional growth opportunities. We expect the operations in Bessemer City and at Nemaska to qualify the downstream EV credits under the critical minerals requirement for the sourcing and processing of lithium. We also believe there could be cost and capital saving opportunities for Livent through the Advanced Manufacturing Production Tax Credit portion of the IRA.

We will continue to grow our production capabilities in North America and build on our leading domestic footprint. But the Bessemer City and Nemaska projects are designed with significant scope and space to build additional production capacity as we continue to grow alongside our customers. Additionally, Livent is advancing designs that will allow any future production lines to be much more flexible in their ability to utilize a wider variety of lithium feedstock material, including various recycling produced lithium streams. With the passage of time, we continue to have increased confidence in the decisions we are making to invest in an Americas-based supply chain.

I want to continue with a few ESG-related updates. On the back of our annual sustainability report published in the second quarter, we have continued to make meaningful strides on a number of fronts. As one of the first lithium producers in the world to become a full member of the initiative for responsible mining assurance, we are leading by example in our industry and helping to drive an agenda for increased transparency, stakeholder engagement and responsible growth. At the end of November, Livent will advance to the next stage of the IRMA process by beginning a voluntary and comprehensive on-site assessment of our Phoenix operations in Argentina. During the on-site review, independent third-party auditors will evaluate our claims and seek direct feedback from various stakeholders, including members of local communities. Our participation sends a strong signal that we welcome input from our stakeholders and have committed to responsible growth and continuous improvement in all aspects of our operations.

Livent's long-standing commitment to sustainability and the progress we're making across ESG is increasingly being recognized by both our customers and independent organizations that evaluate sustainability credentials. Most recently, Livent was placed in the highest tier of sustainable lithium producers in the inaugural ESG report from Benchmark Mineral Intelligence. This is another testament to Livent's leading sustainability profile and the progress we continue to make as we work to deliver on our 2030 and 2040 sustainability commitments.

I will now turn the call back to Dan for questions.

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

[Operator Instructions.] We'll pause for just a moment to compile the Q&A roster. And your first question is from the line of Chris Kapsch with Loop Capital Markets.

Yes. Good afternoon. So, you addressed this somewhat in your formal comments about the industry dynamics, but just obviously, demand outstripping supply -- in fact, one consultancy we talked to is pointing to more, more than, I think, 800,000 metric tons of demand this year. So obviously, this is underpinning the strong pricing cycle, or maybe even paradigms a better word. I'm just curious if this dynamic most recently is influencing the procurement strategy of any major OEs that you're engaged with? Or is it giving you any thoughts on just revamping your commercial strategy, just your thoughts on that?

Chris, good question. Yes and no. I think those of you, including yourself who followed us for many years, know that we have always tried to be commercially focused, right? We don't think the answer (inaudible) for the product and for the market. If you're not engaged with your customers, particularly when you're making hydroxide, you can get really blindsided by changes in battery technology or changes in who's making buying decisions in the supply chain. And so, I think it's fair to say that our commercial engagement has allowed us to constantly sort of look forward and have a reasonably accurate view of sort of what dynamics are coming. And we have largely been, kind of not surprised. I think what we've seen today, I think the interesting dynamic that I see today, I'm not sure it's necessarily driven by the high prices, although I think it gets a bit more attention this way. I think it is the OEM realizing that they're ultimately paying for the lithium. And they are the ones that in the end are going to suffer if they don't have enough access to the lithium. And so, to varying degrees, they're looking around and saying, what role do we play? It can't be zero in most cases. Some -- even people that have been 100% we will buy all the lithium, are backing away from that a little and say that's maybe not possible anymore. And we're going to have to let other parts of the supply chain, see if they can source the lithium too. I mean ultimately, if you're a cathode producer or maybe a cell producer, it's up to you as to what grade of lithium you can use, it's up to you to develop a process, if you can to make it easier to acquire different grades of lithium.

I don't see a massive trend in that. In fact, my conversations with our customers is, frankly, advising them that they are crazy to keep tightening the specifications because they're just making it harder and harder for themselves. But I do think there's going to have to be more flexibility on the part of the OEMs. But I also think that today, there's maybe three or four guys in the world that have actually engaged with actual really credible lithium supply contracts in the OEM world and it's going to have to go broader than that. I think allowing agents or your supply chain to source everything for you, it's going to be really difficult for them. Now are they acting any differently today? No, I think it's an evolution. I think the shortness of supply rather than the prices, and maybe they see the prices as a perfect indicator of the shortness of supply is really what's triggering their behavior, which go back and read our scripts from a year and a half ago, we predicted this. This was going to happen, right? There's going to be a look forward and someone's going to realize they just don't have the raw materials secured. And so, I think there's -- desperation is a strong word, but certainly a lot more concern amongst the auto manufacturers today about whether they will have enough material.

I appreciate that. And so, my follow-up question, and I think you touched upon this, you mentioned a strategic hire. And I did pick up on this in the public domain that I believe this hire is referred to as your -- now your Chief Strategy Officer, this person that she was formerly Head of Battery Materials Procurement, as you put it, in a major EV company. And so, I'm just wondering if you could just elaborate a little bit more on the rationale for the hire and what her mandate will be.

Yes. The rationale the rationale is really, really straightforward. We obviously had a huge amount of engagement with her. She's incredibly talented. She knows the industry probably better than anybody else. And it's a great cultural fit with Livent. And she also brings some other specific skills and qualities that lend herself, for example, to operating in Quebec, which is where we have certainly has we're tasked here with taking the lead on Canada related to us. We see Canada, and particularly Quebec, as being the second hub for Livent after Argentina and an could probably surpass Argentina with time. And there's opportunities broadly in our view across Canada that she'll take the lead on.

But I think also she can help us with just a whole range of different areas of where we take the business. What we do in recycling, for example, what our strategy will be there. How large we go and how big we go in terms of product mix carbonate versus hydroxide even in [metal] space. So, it really reflects the fact that Livent is growing. We can't keep pretending that we're the company we were five years ago or even three years ago, and in three or four years' time, I think we'll be unrecognizable. And to get there, we need more talent. We need people with capabilities, and we need to invest not just in assets and resources, but in the people that we have. I believe the people we have in our areas of expertise are the best in the entire industry. And that is a source of competitive advantage, and we're going to keep adding talent, particularly talent like this person, as much as we can to be honest, Chris.

Your next question is from the line of David Deckelbaum with Cowen & Company.

My first question was just a follow-up on Nemaska. Just wanted to understand the timing. One, I think the last update is estimated CapEx at 100% level is $1 billion. Is that still subject to final feasibility studies? And then I guess, would that CapEx begin already in the first half of 2023. Would that just be early works construction before you might be announcing some sort of holistic financing plan and structure?

That capital number is to what we call an [FEL-3] level, which is essentially we're confident of it to plus or minus 10%, which is the level we insist and [sort of] Investissement Quebec insists we get to in order to give construction approval, too many projects. You've seen numbers out there where their FEL-1 FEL-2 level, which is plus or minus 30%, 40%, 50%, you can't make investments, certainly can't stop ordering items and starting construction that way.

So, it is absolutely a definitive number as far as we will go in terms of the engineering. So, it's a pretty solid number for sure. The spend has frankly already started. Remember, this is an integrated project, it's both the mine and it's the hydroxide plant. The spending of the mine actually already took place in the previous incarnation and it's spending that doesn't have to be repeated.

So, at the mine level, frankly, the mine has sort of sat waiting for the chemical plant. We could certainly start -- we could bring the mine up and running much more quickly, probably sometime maybe in late 2023, early 2024 if we really wanted to. But we're not going to sell spot concentrate. We're not going to export spot concentrate. I don't think the government of Quebec wants us to do that. We don't want to do that. So, we will defer additional spending at the mine until closer to the point of which the chemical plant is built. The chemical plants take two or three years to build. People can tell you whatever they wish, but unless they've got a special magic into some of the long-lead item producers, the crystallizers and some of the -- and by the way, we compete for parts with like copper projects, for example, it's not like everything's unique to lithium. We just can't get this stuff inside two or three years. You shouldn't order this stuff until you're at the [LFP] level anyway.

So, this is just the nature of why it takes so long to build these things. Maybe somebody had a magic path in China, in the West, that's just how long it takes. The groundbreaking to start construction at Becancour will start in January, February. Sure, it's a little more difficult in Canada because it gets so cold in winter, so we have to sort of phase when we start the construction. The construction itself is not, frankly, the item that pushes out till 2025, 2026, it's these long-lead items.

Fair enough. Thanks for the color, Paul. And then my second question, I was hoping to take a stab at the percentage of volumes on market-based pricing. Maybe if you want to stick to high level, you can walk us through the evolution of contracting, which this year, I think, was around 70% of your volumes were fixed price arrangements. And that's evident in kind of the guidance that you're giving through 4Q. One, I guess, would those contracts be coming up for review in 2023. And then certainly, I guess, with the expansion of (inaudible), I assume that the incremental volumes would be under new contracts. Maybe you can give us a high level sense of just that mix shift and when that would be occurring?

And it's really straightforward. I think those contracts we've said this year would roll forward into next year. Those volumes are still under a fixed price next year. The additional volumes, when they come on, with a few adjustments here and there. Lastly, we're free to sell at whatever price we wish. We may do them under contract, we may just sell them, frankly, at [$9.15] or whatever the latest realized price in China is. That's a decision we'll make later in the year as those products come online. But we work almost certainly, even if we contract them, they will be market-exposed prices. I think as you look forward a little bit further, you should assume that as we go through 2024 and 2025, I personally believe the day of the fixed price contract has been killed by the last 12 months. I don't think anybody is renewing the contract at fixed prices.

I think (inaudible) will have a bigger role to play, but there will be a lot of flexibility in market price movements within (inaudible). And the reason for that is very simple, you could get away with a fixed price when sort of the tension over that price was never too great. The market price is $3.00 higher or $3.00 lower. But when the market price is tens and tens of dollars higher, you just have too much tension around a fixed price contract. So whichever way you look at it, fixed price contracts probably are no longer going to be part of our industry, generally speaking, is my own view. And so as fixed price contracts do roll over, they're all going to roll over into some form of market-based pricing.

Your next question is from the line of Stephen Richardson with Evercore ISI.

Good evening. Thanks for the time. Paul, I was wondering if you could address last quarter, we talked about the GM transaction and the presale however you want to categorize it. I'm wondering if you could talk a little bit about conversations with your other customers and how that may have kind of changed the tenor of conversations with other of your potential customers and your existing customers knowing that you have this longer-term commitment and tie up with GM.

Yes. It's an interesting model. I think there are -- I'm going to describe those three different types of customers. There's the customer that has kind of had the market to themselves for many years and their reaction, which I think is largely, as you would expect, no surprise. I mean, the market is evolving. There's a lot more competition coming in. And when that relationship that we've had with customers like it goes back so far and so long that it's an honest open conversation about where are we with each other? What does it mean? And what is expected of that customer as we go forward? And what's expected of us, by the way, with that customer as they move forward.

There's the customers that are contracted with us relatively early in their relationship, tend to get a little nervous that this means there won't be more volumes for them in the future. And so, there's a -- it helps our engagement with that customer because it forces them to come and really understand what our investment plans are, where they sit in those investment plans and equally, what they can do to be more prominent in our future supply plans, which they're all keen to do. And then there's the customers that we don't supply today that have been wanting to be supplied by us. And frankly, I think it creates a little bit of panic and uncertainty on their part.

Again, I don't want to use the word desperation because that's not actually a valid word for what is going on out there, but it's created, I think, more concern that people like Livent, and I think others in the industry, aren't going to have 10 major customers. I think we're going to be serving three or four and we're going to pick the customers that fit best with us on multiple different parameters. And so there comes a bit of a dating game going on, I think, amongst the uncontracted customers as to who do they want to try and persuade to partner up with them.

That's great, very helpful. One thing I was wondering if you could just clarify or give us your read on is the tax credit element on critical minerals as part of the IRA, the language around U.S.-sourced and FDA sourced. Could you just clarify your ability to meet that and your customers' ability to meet that requirement with material that's sourced from Argentina. It sounds like there'll be a pretty broad reading of that. It really just means not China sourced, but I was wondering if you could just --

No, I don't think that's the case. I actually think it's going to be a very narrow reading if you look at the comments that the Treasury Secretary made recently. I don't think the interpretation of the wording is going to be a broad one. I think it's going to be quite a narrow one. I think what is interesting, I think most people's [reading] of it, not as ours, but obviously, our customers read it very carefully, too, which is if the final product coming in is from a country with a free trade agreement, then it's going to be eligible. Frankly, in lithium today that's only one place, that's Chile. Carbonate coming from Chile.

If the product is processed into a secondary product, a usable product in the U.S., that will also qualify. So, lithium carbonate from Argentina into Bessemer City converted to lithium hydroxide, that lithium hydroxide is processed in the U.S., that will qualify. Spodumene concentrate coming out of Australia processed into a carbonate or hydroxide in China will not qualify even though Australia does have a free trade agreement. So, it's not always as clear and as simple as you might think in terms of lithium because you think there's a benefit from Australia, but the product Australia producers can't be used in the U.S., or won't come here. The product in Argentina made by us at least, can be processed into a usable product. And so, although there's no free trade agave with Argentina, that actually will be okay provided it runs through additional value-added processing in the U.S.

It's really helpful clarification. Thank you very much.

Your next question is from the line of Christopher Parkinson with Mizuho.

Paul, can you just quickly run through just the various projects and expansions and just kind of cite where you are, where you expect to be? And just anything that could instill further confidence in getting these up and running for -- over the next year or two? That would be very helpful.

Yes, sure. So first 10,000 tonnes in Argentina, all carbonate, it will be mechanically complete. There's four pieces to it. Three of them will be mechanically complete in the next few weeks. The last one just after the new year, which means that we can start feeding that plant and getting it up and running. It will start producing as we said sometime in the second quarter. The second 10,000-tonne expansion, which was sort of linked to the same infrastructure as this, which is why it's so much quicker, will be mechanically complete 12 months later, so it will go up and running again. And then we have another 20,000 tonne expansion coming that will follow that, which will be mechanically complete by the end of 2024.

So, we've got big chunks coming on at the end of 2022, into 2023 and into 2024 in Argentina. We just mentioned the [mass] that will be done by the end of 2025 and producing in 2026. We have Bessemer City expansion is already complete 5,000 tonnes that will be up and running and producing and shipping to customers sometime early next year. And then we have a 15,000-tonne expansion in China for hydroxide, which will be completed by the end of 2023 and also, no doubt, commercially contributing sometime early mid-2024.

Got it. And just as a quick follow-up, I mean, you and others have been signing a plethora of strategic partnerships. I'm sure you're happy with those. But kind of now that you've had a chance to kind of take a step back and see what you've already been accomplishing, is there anything else on the horizon which the Street should be considering in terms of that? Are you kind of happy with the ones you've already done over the last 12 to 18 months? Any color would be helpful.

Are you talking customer commitments or --

Yes. The customer --

Yes. Our customer commitments, the ones we've made are nowhere near big enough to keep us happy. We just don't have any more supply to sell any more. And so, we're very happy with the customers which lined up with us. I think our engagement with them, their engagement with us, their openness it's just -- it's been really great. It's been really great to see, and we're very happy with it. We would like to sell them more product. Our aim is to get them a lot more product. Our aim is to add maybe one more, maybe two more major customers, but we need to expand our supply first. So, it's a bit chicken and egg. I think it's why we've hired somebody to help us as quickly as we can expand our production footprint also that we can meet the supply requirements to our existing and one or two new customers.

Your next question is from the line of Graham Price with Raymond James.

Just following up on the previous question. I guess, the first [capacity] expansion in Argentina. Once that comes online early next year, how long does that take to ramp up, to reach kind of steady state?

Yes, it's a bit of a -- it depends on the time of the year, frankly. Luckily for us it's coming on in the summer, which means we can usually move the material through the process in a month rather than four or five months. That doesn't mean it will take a month. Just making sure nothing leaks and everything works takes a couple of months. So, my expectation of the team is that they will be producing the two that is capable of being used in our hydroxide plant before the end of the second quarter.

Got it. That makes sense. And then looking to Bessemer City, you mentioned that there is additional capacity for expansion there. Just wondering, ultimately, what the maximum capacity there would be and if you decide to expand the timeframes --

I'm not sure there is a limit. It's a massive site. I mean we used to mine there, right? And so, 200-something acres. We put [room down] for the second 5,000 tonne [line] to sit next to the first one. But frankly, I don't think it would take us [huge lengths] to add multiples of that investment if we could. Frankly, the biggest issue is just expensive to do it in the U.S. It's all very well [one in] U.S.-based production, but someone has to pay for that. It's probably 10x the capital in China. And when you actually think back that the nature of that particular beast is that it requires carbonate and so you also have to source the carbonate in Argentina to put significant capital commitment to expand.

So, it really comes down to where the customers are willing to pay to make it worthwhile. I mean, we can keep doing it. I wouldn't say old day, all year, but we can certainly do multiple iterations in Bessemer City if the customers are there for us.

Your next question comes from the line of Joel Jackson with BMO.

I'll try this question and maybe you'll run with it, or not. Well, let's say that spot prices kind of stay where they are for the next couple of years, okay. What would you think would be your average selling price? So, you've got your fixed pricing locked in for next year, you've got new tonnes, some uncommitted ones. What would kind of Livent's realized price gain kind of the year-over-year in 2023 versus 2022, maybe you can ballpark it or give us a range [so the spot can stay] where it is please.

I know you want me to run with that. I'm going to hold off running with it, but I will answer it next quarter when we give guidance for 2022. It's going to be higher. One way or the other it's going to be higher, but that's not necessarily about the pricing environment. It's about us having more volume and able to sell at that higher price. And I think over time, I don't think -- I really don't think that price we see in China is going to be the benchmark price for lithium pricing in the long run. I really don't. I just -- it's too volatile. It's too variable. And I think too much of the supply chain now is pulling itself out of China for the long run. But for the next three or four years, everyone's going through China still. Let's not forget that. There are no [capital] plans in North America. There's limited capital capability in Europe. The lithium's going into China today, largely. So that's why it's such an important price and why if you are in China with uncontracted volumes, it's a fantastic market to be in. But never where we've been. And I think if we were to [turn around] to all of our customers today, and say, that's it, we're locking you in, you're going to pay whatever the China price is, I think we'd lose a lot of what we offer to these customers in terms of reliability, predictability, partnering. And I think that carries with it pretty big penalties to a business like ours that requires great visibility as to what the electrification road map is of our customers because it impacts what we do, what we make, where we invest. So, I think it will certainly push up average prices in our industry, realized prices next year, for those of us that are -- have a multiyear kind of portfolio of customer contracts, but I don't think anybody is going to reach an average realized price that is close to the China price.

Okay. Maybe I have a two-parter for my second question. Just on Nemaska. I think you said earlier, you're looking at financing options. I mean do you need to start raising capital in Q1? How -- what other capital (inaudible) do you have to pick up? And the second question is, there's a lot of feedback from investors, as you know, that, okay, it's as good as to get to lithium, right? It can't get better, can't get better. And it's $70,000 tonne lithium, there's a reason why people say that, okay. And a lot of things that people will cite as here's what's coming next, whether it be battery inventories, capital inventories, European EV demand elasticity, China, it's over, it's over. What would be your answer to that?

So, look, I think -- let me deal with that one. My answer -- that's pretty straightforward. I don't think in terms of average realized prices for Livent is anything close to as good as it gets. It's not even close. And you and I have spoken about this, right? If the price in China dropped from the $80 that people are quoting to date to half that much next year, our average realized price would still significantly go up and likely to stay there for a few years. Our average realized price is going to go up for two or three more years. This is just a function of us, A, bringing on more volume, and that volume is going to go out the door at a higher average realized price than we saw in 2022, plus these fixed-price contracts I mentioned, expiring and being replaced with floating price contracts.

So, I don't know the full actual earnings delivery for profitability for cash flow generation, I really don't think this is as good as it gets. Is $80 as good as it gets. Our internal prediction is that it's going much higher in Q4, that $80. We'll see because as a former boss of mine said, trees don't grow to the sky. At some point, it has to stop. At some point this has to abate. And I think it's sort of somewhat masked a little bit at the moment. The strengthening of the U.S. dollar means that the prices are relatively constant in USD terms as it continues to climb in RMB terms. There comes a point that's got to stop, but it probably isn't in Q4 of this year.

And your question on Nemaska, I forgot what it was already.

It was -- well, you got the capital -- not the capital -- it's going to start coming quickly to [law], right?

It will be the back end of next year at the earliest, it won't be the first half of next year. We don't expect to have to -- but we're still out there thinking we have a capital raising requirement from Nemaska period, at any point during the project. You won't see a big Livent kind of market call for capital from Nemaska. It's going to come out of existing cash flow or more importantly, there's other sources of financing. I mean, Nemaska stands alone still, it will sort its own financing out. [As an IQ] as the shareholders will dictate what that financing looks like. It's not just going to be every dollar of debt gets provided $0.50 or that they need to get [50% IQ], that's not how we're going to finance this.

Paul, may I ask one more on that. I think you guys are going to count for Nemaska on a, what do you call, like an equity investment kind of basis. Will it be like the Albemarle Greenbushes JV? Are you going to -- is going to be after-tax net income before EBITDA? Or can you tell us how you're going to do it on the income statement?

It's really simple. Unlike other situations, there will be no supply arrangement between Nemaska and Livent. Nemaska's a stand-alone company and so we'll just represent our share of the profits of Nemaska until we consolidate it. We will consolidate it at some point in the future. But until that point, it will just be -- we'll just capture 50% of the net income of Nemaska in a single line item in our --

But not EBITDA? There won't be an EBITDA, it will just be a net income and EPS, correct?

The usual accounting is net income. It's not going to be a proportionate consolidation down the balance of the income statement, it's going to be straight single line [sensitive] net income. Generally [it matters] because Nemaska's not producing or selling in the next two or three years. So, it's kind of irrelevant, to be honest. It's only when it's up and running at which point I would hope we're consolidated by that point. I would hope.

Your next question is from the line of Kevin McCarthy with Vertical Research Partners.

Paul, the theme of reshoring has gained a lot of traction over the last year or two. You've added 5 kilo tons of hydroxide in North Carolina and you're adding triple that amount or 15 kilotons in China, maybe a year from now. I guess my question would be, how do you think the IRA will impact capital allocation moving forward? It seems you've got new credits, state side, but I think you also commented the capital differential is 10x. So, as you look at future needs, how do you weigh those countervailing pros and cons in determining where to add capacity?

Let me start by saying, I don't think there'll be no response to the IRA in other parts of the world. I suspect that -- look, maybe the IRA itself is the response to actions and incentives given in China. I don't know whether Europe is going to have to sort of really just take a long hard look at itself and decide what it wants to be onshored to what it doesn't. It doesn't seem to have a particular coherent policy and certainly doesn't seem to have a particularly well thought out incentive structure to onshore in Europe, but that may happen as well.

I think it's a really difficult question because I think people ask when you get regionally differentiated pricing per product. I think that's quite possible. I think you may have regionally different expectations about how much capital a customer is forced to give you in order to incentivize you to produce. It's a big difference, though. It's a big difference that's going to going to have to be resolved. And I think in lithium and especially in areas like nickel, it will be interesting to me because some of the big producing areas, may actually make them double down and focus on China more and say, look, we just can't meet that. It's either too much capital or because we don't have a free trade agreement. And China actually may get a short-term big advantage out of this, and there may be more investment in China and around China in processing, because bluntly, if you're producing Australian spodumene, you either keep shipping it to China or you got to build onshore hydroxide capability. We know how hard that is in Australia in order to serve the U.S. I don't know many Australian miners are quite emotional about those investment decisions they make. I think they're quite hardheaded about it, and I suspect they're going to keep shipping to China.

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Your sequential price/mix in the quarter was zero. Is it the case that the 70% of fixed price contracts that you have that, that are longer extended, are such that as a base case, that revenue effect on those tons should be zero for the next five quarters. And for the 30% that's not fixed, how long should it remain zero, that is you must have sold forward, I guess, at a certain price or made some commitments. Can you explain that?

Welcome to the call, Jeff. I'm not quite sure I understand your point about sell forward. Look, it's really straightforward. Let's take a really simple example. If our mix of customers between Q2 and Q3 was exactly the same, and I sold exactly the same proportion to my fixed price contracts, and I have different ones, right, so, those proportions are the same quarter-to-quarter. My volume and the amount that goes into the market is also the same. Our Q2 to Q3 realized pricing wasn't massively different, it was a little bit higher in Q3, but not much. So, you would expect price mix in that situation could not be massively different.

If for whatever reason, and you may see this in Q4, the amount going to fixed price contracts relative goes up, my price is going to be down unless there's a massive jump in the market-based piece of it to offset. It's going to go down, right, because the mix works against me at that point in time. It's frankly just math. I mean, I think there's the danger of looking at those on a quarter-by-quarter basis. That's why we don't guide on a quarter-by-quarter basis. We don't really run the business on a quarter-by-quarter basis, we run it on an annual basis. And so, I tend to encourage people to not get too hung up on that piece. However, we're still on track for our full year guidance, while all of our kind of predictions as average realized pricing and mix, etc., for the full year are what we said. And I'd advise, I'd asking you to not get too hung up or read too much into quarterly movements. I know there's a tendency to do that, to try and get more data, but more data, it doesn't necessarily give you a better decision or a better understanding in our industry.

Okay. Then I'll try a longer-term question. And I apologize if it's too naive. What you said is that the cost of construction in North America are sometimes 10x what they are in China. When you look at your lithium hydroxide expansion in China where you're expanding 15,000 tonnes for $25 million, if we scale that up to 34,000 tonnes, that would be $506 million. And at the Nemaska plant, the hydroxide plant, the capital spending is $6.50 to $7.50. So, do we get for $6.50 to $7.50 in Canada, what we get for in $56 [million] in China? Or we get something more --

Fundamentally different projects, fundamentally different projects. You could not build the Quebec, the Canada, the Nemaska spodumene to hydroxide plant for $56 million in China. I mean it's of a different scale. It's of a different complexity. Our carbonate to hydroxide plant bluntly have quite simple processes. They shouldn't cost as much as they do in the U.S. They just do in Europe, too. So, you can't compare those two. You can compare essentially the Bessemer City plant versus a China plant. And that's when I talk about 8x to 10x difference. And it's probably come down a little bit. China has got a bit more expensive, and we have found more efficient ways to do it in the U.S., but it's still 5x, 6x, 7x as much and it's exactly the same plant, exactly the same capabilities. Like I said, don't compare this with Canada, fundamentally different plant.

Our next question is from the line of Corinne Blanchard with Deutsche Bank.

My first question, I would actually appreciate a bit more color on the implied 4Q. So, the guidance was narrow up. But I think in one of the last slides in your presentation, pricing was flat in 3Q and you mentioned expecting increased pricing going into 4Q. I'm just trying to reconcile which kind of segment share growth we can expect for EBITDA, or are we looking at a flattish EBITDA quarter-over-quarter?

Look, I think to see our guidance range, and you know what our year-to-date EBITDA is. So clearly, to meet our guidance range, EBITDA is going to be lower in Q4 than in Q3, but it reflects a bunch of different stuff. It reflects mixed differences in Q4. It reflects -- we've seen increasingly end of Q4, shipping logistics gets difficult. And so, we don't recognize revenue until the product arrives. If the product stays on the water an extra week over New Year or two weeks can impact revenue for sure. We're expecting that to happen. We're expecting that to happen this year. So, there's a whole bunch of different things going on in Q4 which bluntly sort of reflect the specifics of us, they will reflect the specifics of the way our customers are taking product, where they're taking the product and what product it is. Also, the fact that it's the end of the year. So, it's -- I would describe Q4 the broad environment, to be probably slightly stronger than it was in Q3. I think the opportunity in Q4 for us is slightly stronger than it was in Q3, but we are more constrained into how much we can take advantage of that opportunity in Q4 versus Q3.

Okay. And then maybe just a follow-up question on going to switch. On the demand side, I think we have started to see more and more concern about China EBIT demand going into 2023 and (inaudible). I know you have commented a little bit, but anything else you kind of had or have you seen any sign of softness going into the end of this year and next year?

My only comment on this is, when you have lithium growth being, I don't know, 5%, 10%, quarter-over-quarter, and you have battery demand or battery production levels between Q2 and Q3 doubling in China, I think, yes, you've got a lot of room for softening of demand in my view of EVs in China, particularly without it making the slightest dent on the excess of demand over supply. I haven't seen any evidence of slowdown in China. I think there's a lot of expectation that it's going to come. I think there's a lot of nervousness in China about what COVID policies and others are doing to general levels of industrial production.

These haven't been hit anywhere near as hard. Battery production has not been hit anywhere near as hard. There are more and more contracts being signed in Chinese battery companies for export into Western vehicles. So, it's not just the EV market in China that's driving battery production activity in China. So, it's just one factor. It's a complicated market. There's a lot of pieces moving around. We've yet to find many examples of a single metric, having clearly determinative effects on the lithium demand, it tends to be a bunch of different factors that are happening that will drive the impact on our industry.

This concludes the Q&A portion of today's call. I will now turn the call over to Daniel Rosen for any closing comments.

That's all the time we have for the call today, but we will be available following the call to address any additional questions you may have. Thanks, everyone, and have a good evening.

This concludes the Livent Corporation Third Quarter 2022 Earnings Release Conference Call. Thank you. You may now disconnect.