Livent Corp (LTHM) 2022 Q4 法說會逐字稿

Good afternoon, everyone. Welcome to the Fourth Quarter 2022 Earnings Release Conference Call for Livent Corporation.

(Operator Instructions)

I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Rosen, you may begin.

Thank you, Bo. Good evening, everyone, and welcome to Livent's Fourth Quarter and Full Year 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 our 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 1 question and 1 follow-up per caller. We'd 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 continued its strong performance in the fourth quarter and finished the full year 2022 with record financial results. Adjusted EBITDA of $367 million in 2022 was over 5x higher than in 2021. This significant improvement was a result of higher average realized prices across all of our lithium products. We expect to generate higher profitability in 2023 as we build on this performance. This is driven by further increases in average realized prices across our portfolio of lithium products as well as higher sales volumes with the first phase of our Argentina expansion coming online during the year.

We are expecting roughly 20% higher sales volumes in 2023, starting in the second half of the year. This translates to an adjusted EBITDA guidance range of $510 million to $580 million, a roughly 50% year-over-year increase at the midpoint. We expect further enhancements to Livent's revenue growth, profitability and cash flow as we bring additional volumes online in 2024 and in the following years.

Before I get into more detail regarding 2023 and other focus areas, I'll turn the call over to Gilberto to discuss our fourth quarter and full year 2022 performance as well as our announced 2023 financial guidance.

Thanks, Paul, and good evening, everyone. Turning to Slide 4. Livent reported fourth quarter revenue of $219 million, adjusted EBITDA of $108 million and adjusted earnings of $0.40 per diluted share, while up considerably versus the same quarter in 2021, results were roughly flat versus the third quarter. As highlighted in our last earnings call, a larger portion of sales were delivered to customers under older contracts with price at a lower fixed prices, resulting in a negative mix impact. For the full year 2022, we reported revenue of $813 million, adjusted EBITDA of $367 million and $1.40 of adjusted earnings per diluted share, all records for the company.

Revenue was up 93% versus the prior year. Higher average realized prices across all region products more than offset slightly lower volumes sold versus 2021. The volume differential was primarily driven by lower lithium chloride sales as well as the building of inventory to support the start-up of our new carbonate and hydroxide production units in 2023. Adjusted EBITDA which came in at the upper end of our guidance range was over 5x higher year-over-year. Higher average realized prices easily offset an increase in operating costs. While pricing was higher across all full suite of lithium products, the improvements were most notable in the uncontracted portion of our lithium hydroxide and carbonate volumes. The pricing benefit was also notable in our butyllithium and high-purity metal businesses, where we successfully shifted from annual to monthly price setting arrangements with most of our customers.

Our butyllithium business grew to roughly 1/3 of total revenue for the year. We expect it will continue to be an important and profitable business for the company. Livent's total capital spend in 2022 was $327 million, in line with our guidance. This was a step-up from 2021, reflecting our progress on multiple expansion projects. Our balance sheet and overall liquidity remains very strong. We ended 2022 with $189 million in cash and no draw on our $500 million revolving credit facility. This revolver was upsized by $100 million during 2022 and renewed for an additional 5 years to 2027. The combination of our current cash position, our ability to draw on the credit facility and a strong outlook for cash generation from higher volumes and sustained pricing give us continued confidence in our ability to internally fund our capacity expansions.

Let me now comment on our financial guidance for 2023 on Slide 5. Livent expects another substantial improvement in financial performance, driving record results in 2023. For the full year, Livent's projects revenue to be in the range of $1 billion to $1.1 billion and adjusted EBITDA to be $510 million to $580 million. This represents growth of roughly 30% and 50%, respectively, at the midpoint versus 2022. Our guidance is based on higher volumes sold and a higher average realized pricing across our portfolio of lithium products, partially offset by higher anticipated costs.

We further highlight some of the key drivers on Slide 6. Livent expects to sell 20% higher sales volumes or roughly 4,000 metric tons on an LCE basis versus 2022. This increase will largely be in the form of lithium hydroxide sales and is driven by our initial phases of expansion coming online. Our first 10,000 metric ton expansion of lithium carbonate in Argentina is substantially complete and is in the process of starting up. We expect commercial volumes from this expansion to be available for sale in the second half of 2023.

Incremental production this year will largely see our new 5,000 metric ton lithium hydroxide line in Bessemer City, North Carolina, which was completed at the end of last year. With this new unit, Livent remains the largest producer of lithium hydroxide in the United States with 15,000 metric tons of domestic capacity, one of the few producing lithium hydroxide companies outside of China today. We are also expecting meaningful pricing improvement in 2023 with higher average realized prices across our portfolio of lithium products. We will go into more detail shortly on specific components related to our lithium products and our customers. However, it is important to emphasize that our guidance does not rely on an increase in the lithium market price from current levels. As we have said in the past, given the nature of Livent's contracts, we expect a continued increase in our average realized price in 2023 under a wide range of market scenarios.

At the same time, we expect some higher costs in 2023, although not enough to offset further anticipated margin improvement. The biggest drivers of higher costs are royalty payments in Argentina, the cost incurred in commission of new production units and broad inflationary pressures. For royalties, the increase is due to a higher average expected lithium reference price on which royalties are based in 2023 versus the prior year. And to be clear, the underlying percentage paid for our royalties calculation has not changed and the reference price is based on an average export price out of Argentina and Chile.

For start-up costs, there are inefficiencies that come with initially operating new plants at lower production rates, and we would expect this impact to be temporary in nature. We also continue to see higher costs for raw materials, such as soda ash, for energy and for labor, although not in the same magnitude as experienced in 2022.

I want to conclude by providing 2023 guidance range for other financial metrics. Livent expects depreciation and amortization to be in the range of $46 million to $52 million. This is a step-up from 2022 and is due to the start of depreciating capital investment related to the new production as we bring it online. We expect Livent's adjusted tax rate to be 16% to 19%. This reflects a continued improvement as a result of our evolving business mix and adjustment to internal corporate structure sees being spun off as a stand-alone public company.

Livent's 2023 capital expenditures are anticipated to be $325 million to $375 million, slightly higher than 2022, and will be supported by an adjusted cash from operations, projecting the range of $360 million to $440 million.

I will now turn the call back to Paul to provide some additional context for our '23 guidance and how we position ourselves for the year ahead.

Thanks, Gilberto. On Slide 7, we want to provide a framework for how to think about Livent's expectations for average realized prices in 2023. As mentioned earlier, we are expecting roughly 4,000 metric tons in LCEs of additional sales in 2023, most of which will be in the form of lithium hydroxide. You can see that roughly 70% of our volumes have fixed pricing terms that have already been set for 2023. There are a number of customers that fall into this group, some of which are still being supported under legacy contracts and others that were agreed to around the end of 2022 with pricing more reflective of current market conditions.

Because we've agreed to a set of fixed price for each customer for all of 2023, and these are take-or-pay commitments. We have very high confidence regarding the roughly 40% average expected price increase across these volumes. This allows us to strike a balance between locking in attractive prices for 2023 and retaining upside as we move through the year. For clarity, we have only 1 fixed volume contract in place today where pricing is already set for 2024 with the rest of our volumes subject to either a price escalation or market-based price structures.

Annual fixed price has continued to be preferred by a subset of our customers looking for cost predictability, particularly to manage their own budgeting processes. We approach each 1 independently and are willing to engage with our strategic customers to balance both of our needs in these volatile and unpredictable price environments. Therefore, if market prices continue to remain above our average realized price, we would expect there to be further pricing upside on these volumes next year.

The smaller remaining hydroxide and carbonate volumes, roughly 20% of our expected LCEs for sale in 2023 under a few different variable pricing structures with adjustments typically made on a monthly basis. It is in the variable pricing segment where we maintain the greatest exposure to market prices. We are expecting average realized prices for these volumes to be slightly up in 2023, largely due to the much lower price levels we saw in Q1 last year, which dragged down our 2022 average realized price.

Given this, and the fact that in Q4, market-based pricing was a lower portion of our overall sales than prior quarters means that this group could still achieve higher average realized prices year-over-year for Livent even if market prices pull back from current levels.

Additionally, while there's a lot of attention paid to movement in the China spot market, this is not reflective of the entire market. As you can see, when you study various export and import statistics for countries such as Chile, Argentina, Japan and Korea.

Lastly, we will have variable pricing in our other specialty segment, which is largely comprised of our butyllithium and high-purity metal business. For 2023, it represents about 3,000 metric tons of our expected LCEs but as much as 30% of our total revenues. We expect average realized pricing to be roughly flat in 2023 year-over-year for this group. And while these volumes are also exposed to monthly changes in pricing, it is largely structured as a pass-through of changes in lithium metal input cost, meaning the operating margin is more stable than changes in revenue might suggest.

On Slide 8, I want to highlight what you can expect from Livent in 2023. First, continued strong financial performance following a record year in '22, 2023 will be the first of an upcoming sequence of years that Livent will see the benefit of incremental production volumes as a result of multiple years of expansion investment. As Gilberto mentioned, we're expecting a 50% increase in adjusted EBITDA in 2023 at the midpoint of our guidance at a time where a lot of investor focus is on the potential implications of a near-term pullback in China spot prices. Increased production for Livent will continue in 2024 and the years to follow as we progress on our various expansion plans and will be a significant driver of future financial growth. This will result in meaningfully higher cash flow generation for the company that is much more balanced around a wider range of pricing assumptions.

Second, we remain on schedule to deliver all of our announced capacity expansions. We expect to complete our second 10,000 metric tone expansion of lithium carbonate in Argentina by the end of 2023, with first production from this expansion expected in early 2024. So as at year-end 2023, we expect nameplate lithium carbonate capacity to be double out of 2022, approaching 40,000 metric tons.

Outside of Argentina, construction began in a 15,000 metric ton lithium hydroxide facility at a new location in the province of Zhejiang, China. First, commercial volumes from this [facility] are expected in 2024 and it will increase our total global lithium hydroxide capacity to 45,000 metric tons. Beyond 2024, Livent continues to progress engineering and evaluation work on additional planned carbonate expansion phases in Argentina as well as additional hydroxide expansions that include lower-grade lithium recycling capabilities. We expect to share further details on all of these fronts later this year.

Third, Livent plans to release a resources and reserves report at the end of this month with our 10-K filing. This will be Livent's first published resources and reserves report, but it is supported by decades of historical operating data. The report will give investors, stakeholders and other interested parties an ability to evaluate the size, scale and cost structure of our operations at Salar del Hombre Muerto as well as how we can support our expansion plans in a sustainable manner.

Finally, we want to provide an update on Nemaska Lithium, a fully integrated lithium hydroxide project located in Québec, Canada in which Livent is a 50% owner.

Turning to Slide 9. We provided a time line with key milestones leading to commercial production at Nemaska Lithium. The project is reaching the conclusion of its detailed engineering phase, and you can expect a number of key updates in the first half of this year. A feasibility study is being finalized and is expected to be published in the coming months. It will demonstrate why Livent remains as committed as ever to helping bring the project into production. And why Nemaska Lithium will be critical to a future North American supply chain. Shortly thereafter, project construction is expected to formally begin, although the team has already begun ordering important long-lead equipment and is commencing on-site preparations as we speak.

As part of the construction decision, Nemaska Lithium will outline preliminary sources of financing, which are expected to be comprised of a number of attractive options. The structure will likely include a combination of third-party debt financing, including potential low-cost government funding, prepayments from customers and funding from Nemaska Lithium's 2 current shareholders, Livent and Investissement Quebec. Livent continues to provide technical and commercial expertise to Nemaska Lithium and has been appointed to engage in sales and marketing efforts on its behalf. We expect Nemaska Lithium to announce its first customer commitments in the first half of 2023, including any project funding contributions from these customers.

With respect to timing, we expect Nemaska Lithium to begin generating revenues in the first half of 2025. Initial sales are expected to be in the form of spodumene concentrate as Nemaska Lithium will look to bring the Whabouchi mine and concentrator online as quickly as feasible, which is anticipated to be before the end of 2024. These spodumene sales will be a temporary source of additional cash flow until the downstream hydroxide facility at Bécancour comes into production and Nemaska Lithium is operating as a fully integrated project. We expect first hydroxide production by 2026 on a 34,000 metric ton nameplate battery-grade hydroxide facility powered by low-cost green hydroelectric energy.

Nemaska Lithium continues to be a highly attractive project. Its strategic location drove strong interest from potential North American and European customers who are becoming increasingly focused on localization. It is well positioned to take advantage of various government incentives like the inflation Reduction Act in the U.S. to promote domestic energy storage supply chains.

Additionally, Nemaska Lithium has a critical first mover advantage in the region having already secured space at an industrial part being developed in Bécancour at a time when access to infrastructure and proximity to ship imports are key challenges for many development projects. I want to conclude on Slide 10 with some commentary on market conditions.

Before turning to 2023 expectations and some of the short-term data points many are focused on in China, we should take a step back and acknowledge that '22 was another exceptional year for lithium demand and the broader electric vehicle supply chain. For the full year 2022, global EV sales are believed to have exceeded 10 million units growing well over 50% versus 2021. Within China, EV sales are expected to have nearly doubled to roughly 6.5 million vehicles. On the battery side, total global installations across all applications were up roughly 60% year-over-year.

Lithium demand remained very strong throughout 2022. It was a year when lithium prices steadily climbed higher on the back of a widening supply deficit, underscoring yet again the challenges for battery grade supply to keep up with compounding demand growth. And despite concerns of higher lithium prices potentially being demand destructive, we have not seen any evidence of this today. In fact, despite facing higher input costs, we saw encouraging performance and commentary from a number of leading EV and battery producers in '22. There's understandably a lot of focus on China today given a number of combined near-term factors including the impact of moving away from zero COVID policies, the removal of subsidies that have previously been extended for a few years running and the first decline in spot prices after an unprecedented rental levels well above what most people would consider rational.

While it will take some time to assess how things progress as we come out of this seasonally quiet period around Spring Festival, there are a few points I want to highlight. While many have referenced substantial inventory builds within the EV supply chain, this is something that we simply have not seen today, particularly upstream at the lithium consumer level. Recent data from SMM provides a clear example of this. When looking at monthly (inaudible) demand, which continues to grow as expected, versus the amount of downstream lithium carbonate inventory available, the ratio hit new lows approaching year-end 2022. This makes sense as lithium consumers look to destock throughout the year in the face of higher prices.

While there appears to have been some inventory increase to begin 2023, it is likely related to lower consumption levels during the Lunar holiday slowdown in China. What is clear is that continued destocking similar to last year will be very challenging given the difficulty in maintaining historically low inventory levels for an extended period of time, restocking should naturally be expected at some time. This is especially the case if demand continues to be strong, which is still very much the base case for most in the industry.

Benchmark Minerals, among others, is expecting total LCE demand growth of around 40% in 2023. Some of the largest lithium companies have also taken their own demand estimates up considerably in '23 and even higher in the following years. Demand growth does not need to be linear and prices could certainly move around quite a bit in the interim, but the point remains that we don't see long-term fundamentals being meaningfully different based on any recent data points or speculation.

Additionally, there were no indications that we're on the verge of a meaningful oversupply of lithium anytime soon, while new supply selected to come online in 2023, there have already been multiple announcements of delays and meaningful cost increases globally. Others have announced they will prioritize bringing volumes online as quickly as possible at the expense of producing qualified battery-grade material.

Finally, there is not enough discussion about structural increases in the cost of both building and operating lithium assets. These higher costs are only being amplified as the desire for localized supply chains grow, and this isn't a trend that we expect to reverse anytime soon. As the cost curve continues to push upward, it will become clear that lithium prices need to remain higher for longer and the reinvestment economics in our industry have fundamentally reset.

When putting all this together, it's hard to envision a probable scenario where the lithium market does not remain structurally tied to varying degrees over the coming years. Now before concluding, I want to thank our Livent employees and partners around the world for a great year in 2022. They continue to work tirelessly to meet our expansion milestones in 2023. These are all big undertakings, and they're doing all of this work while staying focused on advancing Livent's core operating priorities of safety, quality and reliability, making positive contributions to our communities, working closely with customers to advance innovation and sustainability and providing a great work experience for all. Together, I'm confident that we'll make 2023 a landmark year for Livent and our customers.

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

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

(Operator Instructions)

And we'll take our first question this afternoon from Steve Richardson of Evercore ISI.

Paul, first question on Nemaska. And I think you hit on it, talking about the structurally higher costs in the industry, but we've seen some updates from some other comparable integrated projects in North America of late. And I was wondering, I don't want to front-run the PFS here, but if you could just talk about what you're seeing in terms of costs and trends? And then more importantly, like why would this project be advantageously positioned relative to some others in the North America context?

Yes, it's a difficult question to answer in a way that I think is going to fully satisfy you, but let me sort of make a few observations. I think the first thing to really understand is that every project is different, and that's especially the case as this industry develops. There's a big difference between, for example, expanding an established brine project and building a brand new brine project in South America. One has a lot of infrastructure, 1 doesn't, so the predictability of cost is different for new projects than it is for existing projects that are being expanded. It's also very different on a technology-by-technology basis. It's very different using a conventional mining and a conventional conversion process relative to maybe some of the nonconventional sources of lithium that we have out there that our people are running projects on.

And so I think this degree of predictability and certainty, I think people have maybe overestimated how much visibility we have on projects and nobody has really taken on in any scale before. We definitely see meaningful changes driven by a few factors for all projects. They take longer, first and foremost. Secondly, there's a lot of competition for labor, qualified labor is scarce and in certain parts of the world, we've seen competition from non-lithium projects, oil and gas projects, for example, which are ramping back up in certain parts of the world.

And we see competition for basically the fab yards where some of the major long-lead items are being made. And so you either wait longer, which has implications for cost so you have to pay more for these -- some of these specific items. And you're also seeing some issues with scaling. People are trying to go bigger, quicker as we said, and I think it's not always linear and there aren't always cost savings in the initial expansionary phase.

I think there's no doubt that when you look at predictable cost curves, predictable capital expenditure curves, a project like Nemaska, which is frankly not earth breaking or groundbreaking in any new technology, any new processes, it is in a part of the world that is, frankly, a little bit more expensive to build in than some others. But that's largely offset by the fact that it will have a low operate cost than many others given its low-cost energy, it's proximity to key markets. It is clearly advantageous with regard to IRA qualified material and will be advantageous.

And it's not easy to see many other projects in North America with the same certainty. So the industry needs a whole wide range of projects. So this is not resource competition. This is not me saying Nemaska Lithium is a far better project than project X or project Y and, therefore, project X or Y shouldn't be developed. They're all going to be. They don't need to be developed to meet demand levels. But I think it's pretty important that you look at each project, really in great detail in its own right when you sort of form the question as to how credible some of the forecast of capital expenditure and how credible some of the future operating costs are.

Appreciate the color. We look forward to the update later in the year. Just perhaps a quick follow-up, just could you help us bridge the 4kt LCE growth this year implied by guidance versus what was talked about last quarter in terms of, I believe, 6. I think they're probably not the same basis and we're talking -- just wondering if you could just confirm, has any schedule changed in Argentina? Or is this inventory or am I counting LCEs wrong?

No, no. It is pretty straightforward. We're a few months late in Argentina, right. In the grand scheme of things, 2 or 3 months doesn't make a big difference. But in a calendar year, when you're adding 10,000 tons, obviously, it means we're short 1,000 tons or 2,000 tons compared to what we said before. The reason is really linked to your first question. There were challenges to every single project.

And I think we've seen some of the other projects in Argentina and similar phases made similar comments. It's difficult to get that final 5% done. There's a lot of local content requirements to the level of a local labor requirements in there as well. And it doesn't take much if you have a few pieces of piping or a few electrical connects, it's relatively basic stuff that are late arriving that are held to put the port that open some customers' disputes. So they're really sort of the traffic blocking and tackling that's needed at the very end of a project that slowed us down in the first part of the year, nothing major. It's really just my engineers will the same. It's posing the last few pieces of pipe and making the last few connectors in place, but we are a couple of months late relative to what we had hoped.

We go next now to Chris Kapsch at Loop Capital Markets.

So 1 follow-up on that question about the couple of months delay 4 versus 6. Does that sort of just challenges it cascade into the next expansion that was slated for late calendar '23 into '24? So I'm just wondering if you're going to get, I guess, extra by pushing out the volumes this year you're going to get extra volume incremental next year. But just wondering if the delay if you're seeing that cascade into your further expansions?

No, they're completely separate and distinct work streams completely for this very reason, they've run a separate and independent parallel processes. I actually would hope that we learn from these last mile challenges that we have and get ahead of them. I think the team understand better now what is -- this is the first time we've been through the 5% of a project. We know we have another one coming at the back end of this year. So I would expect that the learnings from this will give us even more certainty of delivering that second phase on time.

Got it. And then thank you for the Page 7, which sort of frames the fixed versus variable versus butyl. That's helpful. A question on that would be just on the portion of hydroxide and carbonate fixed price is well fixed right now and you see that up, the realized pricing up 40%. Is it fair to say that those -- some of those customers, there's still ongoing contract negotiations, they become perpetual, those conversations? Or are those fixed -- absolutely fixed for calendar '23?

Yes. No, they are -- it's a mix, honestly, it's without getting too far into the details. The -- none of them are really negotiated still in 2023. We are 95% plus of those numbers with regard to 2023. But they really make up, I think it's probably fair to say 3 different types of pricing structures. There's some that were agreed in the past quarters rolled through this year. There are some prices in there that are new prices that were fixed for 2023, but we'll either be rediscussed at the end of the year or we've already agreed a step-up for 2024 or they'll move to market-based pricing in 2024. So they'll migrate at that point or they are sort of market-based prices that have ceilings in them, and we're already over the ceiling. So the pricing is bouncing a ceiling in the agreement. So they're technically market-based, but we're pretty confident the market price is going to be above the ceiling, so they'll stay up there.

We only have -- look, every customer we have, every one of them today has either moved to market-based pricing or has made a commitment to move to market-based pricing in the next year or 2. We have, frankly, 1 customer that has not made that commitment. They are still buying volumes from us outside the contract on market-based structure. So they sort of implicitly agreed it and accept that this is where the world is going to. So we'll see this transition continue as we get late through '23 into '24. By the time we get into '25, '26, certainly by '25, I don't expect to see really any of our volumes not being linked to market prices by that point.

We go next now to Kevin McCarthy of Vertical Research Partners.

Paul, I appreciate your updated views on prospects for growth in China in light of the challenges that you mentioned in your prepared remarks. In other words, COVID transition lack of subsidy renewal and the spot dynamics? And then I guess related to that, on Slide 10, I appreciate this inventory chart. Just as a clarification, is that meant to include producer inventory or inventory all the way through the chain? I certainly welcome any thoughts on your end as to those levels downstream.

Yes. Let me answer that one first because it's easier. That is lithium inventory held at either a consumer of lithium or cathode producer or -- probably a cathode producers and that the lithium producers themselves. So it's a lithium inventory. It's not designed to speak to, obviously, lithium in the form of cathodes. It's just pure basic lithium carbonate held either at a lithium producer or at the customer themselves. And that's how we understand the data from SMM.

And in terms of growth in China, first of all, we've not yet. But hopefully, we won't see a post Sprint Festival COVID revamped. So we don't see a lot of implications today, at least from COVID in the market. I think in terms of removal of subsidies, I mean, this is a market that -- I think it's kind of reached exit velocity, frankly, when you're doubling your total number of vehicles in a year, when sales are at this level when there are, frankly, fewer and fewer non-EV alternatives in China, we don't really see from EV vehicles sold in China a massive impact to demand from the removal of substance. There will be some, but this is a market that continues to grow anywhere anyway. Perhaps more importantly in China, you have to understand, most of the lithium today, as you know, battery applications is, in fact, going into China anyway, where the processing to cathode if it leaves the country again afterwards.

So I think China itself is going to continue to be a source of growth. Just a final point for you and a data point that maybe is lost for a lot of people. Today, about 40% or maybe a little bit more of the demand is actually not by EVs, so we look at subsidies for EVs, et cetera. Stationary storage and a whole bunch of other applications are not EV related.

And they're actually growing quicker today, we believe, than EV applications on an installed capacity basis. When you look at total gigawatt hours of demand, we're actually seeing a larger growth in the non-EV applications and in the EV applications. And so subsidies and regulations, et cetera, while important, are not the only part of what's driving demand growth for battery materials.

As a follow-up to a prior line of questioning. Paul, how do you see the global cost curve evolving over the next, let's say, 3 or 4 years? Where do you think fourth quartile production economics will migrate to given the need to exploit higher-cost resources moving forward?

I think if you look at -- let's take Chinese lepidolite processes, for example, today. I mean it's not that easy to get really reliable data in there. And the same is true over some of the Chinese recycling streams that we see. What it feels like you've got a sort of a marginal price in there of the $25 to $30 a kilo. So if that remains the marginal producer in the fourth quarter, I don't see that cost falling under any circumstances, sort of structural as to the challenges of processing that particular type of ore and the energy they have and the seasonality of that business as well. It's hard to sort of assess the rest of the market to be perfectly honest. There's no doubt that if you saw a $3 per kilo cost, that's probably $5 or $6 today with higher operating cost, energy cost, third-party cost. If you saw a $7 or $8, these are all cash costs that they gave, by the way. So they don't at all include capital costs, the $7 or $8 probably dwell into double digits today.

And then on fourth quartile, I mean, they're solidly sort of first, second quartile production assets by any historical cost curve. So it's definitely moving up and moving up quickly. And I think as you look at some of the ore bodies that have been brought under a hard rock, if you look at the model, the model remains, develop the mine and ship it somewhere else, they ship the product to a third-party toller. It's just the most expensive way to do it. And as more of the business is produced that way, more of the material is produced that way rather than as integrated production then the cost is going to keep going higher.

I think from most people, given the technical challenges and the increased capital required of producing, say, a hydroxide plant, most people who own a lithium asset today are not going to go to the trouble of developing a lithium hydroxide asset. So it doesn't matter what the resource cost is, they're fundamentally producing lithium on that model on a higher cost structure and nonintegrated structure. So it's -- these are all pressures that are just going to keep pushing the marginal cost higher.

We go next now to David Deckelbaum at Cowen and Company.

I did just want to follow up a little bit on the pricing conversation to confirm a couple of things. One, the 40% increase year-over-year, does that reflect contract negotiations that occurred for 2023? Were these earlier than expected? And then the latter part is you highlighted that you only have 1 remaining fixed contract for 2024. What does that currently represent as a percentage of your contract exposure or sales?

When you think about how we contract business, let me just step back before I answer the specifics of that. And just to sort of remind you how maybe we're a little different to pretty much anybody else in the industry. Just remember, we sell largely hydroxide, and we sell largely hydroxide into high-nickel battery applications. We do have others , for example, and other applications. But we're largely selling into that space. The characteristics of that are a little bit different to what you might see elsewhere.

First and foremost, you have to develop long-standing relationships with customers because the process of qualification, just the sheer complexity of that supply chain, the cost of qualifying your material, et cetera. Frankly, the fact that for many of our customers, almost all of them, we run a specific grade for that customer specific packaging for that customer. You sort of -- you're always in a bit of a dance with your customer about these commitments as why you see us talk about take-or-pay in hydroxide, which we don't do with carbonate, not most others.

You'll see us talk about selling "Under contracts on the hydroxide," which we don't do and I think most won't do in carbonate. It really is a very different business. So the conversations with the customers are for one of a better description perpetual. I think the easiest solution many customers are seeing to this, especially as the OEMs are increasingly becoming the customers. But even with the battery producers who themselves are trying to make sure that they with a price that isn't reflective of market conditions is to move to market-based pricing.

And so in most cases, what customers are trying to do is to figure out what that means, what is the market price, other indices we can look to? Does it involve annual renegotiations, a bit of a blast from the past from 5 to 10 years ago when everything was negotiated that way? These are all perpetual negotiations. They are -- the volumes you see there are largely done under contractual commitments. They, I believe, frankly, will continue to change over the next 2 to 3 years as the market evolves as customers get a better view of where they want material shipped to, how much the IRA is going to change their supply chain and how much premium, if any, they're willing to put on U.S. source material, which battery technologies they follow? Do they all stay high nickel? Do some of them get pushed towards carbonate-based technologies, given challenges in getting enough hydroxide?

So when we sit down and when we look at these negotiations, I think it's going to be different every single year. I wouldn't expect the customers to change. We'll put more volumes to some customers. We'll add 1 or 2 new customers. But what I would expect to happen as this market evolves, is that we get closer to market economics in any given year. I'm not going to unfortunately be able to answer your question as to how much of the volume is under that 1 fixed price contract.

But you can imagine that as we go forward, as we add more volume, again, there'll be less of this conversation necessary because more and more of our volume is going to be whether through contractual agreements that last multiple years or whether because of annual conversations are going to essentially reflect whatever the market conditions are at any -- at that point in time.

I appreciate that, Paul. My second question was just on Nemaska. Gilberto, is there a contingency in the CapEx guidance for '23 for Nemaska or would the DFS that comes out in the first half, would that present potentially incremental cost to that CapEx guidance?

It will not because the CapEx that we have there is predominantly for our growth projects at Livent. And at Nemaska, if we do anything, it would be a capital infusion, which is going to be honestly not material at this stage.

We will go next now to Christopher Parkinson at Mizuho Securities.

Can you just give us a little bit more color on the incremental the 20,000 tons and the updated cadence in terms of when those tons are essentially being priced in, are they going to be rolled into existing contracts with existing customers, so on and so forth? Just trying to get a better sense of if that changes your exposure to spot over the next 18 to 24 months.

Chris, yes, I think as we've said before, all that volume is going to find its way into pricing structures that reflect the market conditions at the time. Some of them -- frankly, some of those volumes we need to meet contractual commitments that we've already signed, but those contractual commitments are market-based pricing, they reference market basis indices, et cetera. So yes, they've spoken for, but they're not priced yet. They'll be priced in the market at the time. Some of the rest of that volume will be committed closer to the time, and it won't be on a fixed -- it won't be on a multiyear fixed price.

I think we've demonstrated this year we're willing to take a look at into the world and say, is there a price at which we're willing to set the pricing for the next upcoming year. And the answer is yes. And the answer is -- the question we'll answer every single year is how much of my portfolio am I willing to fix on that basis?

Frankly, even many of the contractual structures we go into with customers are not going to be monthly resets, probably quarterly resets in most cases. So I think it's all designed to sort of putting a little bit more predictability to some of these customers as they look at their annual pricing structures. But all of that volume as it comes on, as I said, I just -- I think the fixed price contract is a dinosaur that's dying out. And I think there won't be any renewals, extensions, expansions of contracts that are multiyear fixed-price contracts. They're all going to have a reference to the market at some -- in some way, shape or form embedded in them.

That's very helpful. And just you hit on a few times regarding the IRA and your exposure obviously, the Nemaska. But could you just hit on -- obviously, one of your competitors is fairly vocal on this. Can you sit on how you're thinking about it in terms of your U.S. assets? The relationship with Argentina. Obviously, there's been a lot of with Chile's relationship and even with the EU regarding some trade relationships within the last couple of months. Can you just hit on your overall thought process there, what you're hearing from your customers and how we should be thinking about that in the context of the Livent story?

Always the easy questions, Chris, thanks. Okay, I think it's probably fair to say -- it's fair to say that -- it's difficult for anybody, as included automotive countries or anybody to build a 10-, 15-, 20-year investment leases on the basis of the IRA or any other individual government incentive program that's put in place, you have to be comfortable the asset can stand alone without a short-term government support infrastructure in place. There's a lot still to be resolved with the IRA. There's a lot of debates, conversations going on lobbying, clearly as to what is and what is not IRA compliance. I mean clearly, this the country idea, free trade agreement idea is important.

But the same is true for customers or users who maybe are not selling vehicles that qualify or they don't sell to customers that are in an income bracket that qualifies. And so I don't think it's going to be a simple case of a U.S. asset producing a lithium product is going to be hugely valuable. I mean an example is, today, at least, there aren't a lot of plans out there of scale to build U.S.-based battery capacity that uses lithium carbonate, right? So it's okay, bringing online lithium carbonate from the U.S., but somewhere, somehow it's going to have to be turned into lithium hydroxide.

Now that could change, right? We could see a shift in carbonate-based battery technologies, building supply chains in the U.S., the IRA doesn't necessarily incentivize that. So there's a lot of complexity around lithium assets. I think that the truth remains, you've got to be able to produce a quality product that is battery grade and you have to have a reasonable cost position. Otherwise, no amount of government incentives are going to help you out of that position.

We'll go next now to Matt DeYoe at Bank of America.

So you're going to 40,000 metric tons at Hombre Muerto. And I think in the past, you said you could do 100,000 or perhaps that's possible. How do you get there from here? Appears some of your peers being a bit more aggressive with scaled expansions than I guess you've historically taken. So can you get to 60,000 new tons over 2 stages? Or should we expect more incremental adds?

So Hombre Muerto can go -- the resource can go big, right? And you'll see that when the resource report comes out. This is not a resource constraint issue. So let's take that to 1 side. It's infrastructure, frankly. The single biggest issue for sure is infrastructure. If you guys ever get a temp to visit there, you'll realize it's not a place that you can surely fill with ponds like you can the Atacama. So you need a different technology to scale this as we have one, right? The DLE processes we use is eminently scalable to 100,000 tons. And if the energy supply and the fresh water supply is available and/or we can develop technologies like water, et cetera, or I think our expectation today, though, is based on what we can see is we're not willing to commit to more than 60,000 down there without some developments in those areas.

We're working on them, and this is not a static decision, but we certainly have plans to go to 60,000 tons in the next few years, and they're being actively engineered, pursued and planned right now. I think we talked about getting to 100,000 when you take into account the Nemaska Lithium exposure that we have as well. I hope that we can move Argentina to 100,000 wide because I think it's really difficult for the industry as a whole to supply the lithium that people need without Argentina, Chile stepping up with much higher volumes than people are producing today. I mean it's the biggest resources, it's frankly the most environmentally friendly way to produce lithium is not perfect, but it's certainly better than many of the sort of hard rock-based processes that are nonintegrated that involve moving rock halfway around the world.

And it's reasonably low cost. And it's -- they're both countries that are largely speaking -- supporting the development of the lithium industry with their own personal flavors. So we certainly hope to get there, but we're realistic that there's some big infrastructure questions that need to be answered before we can make that jump from 60,000 to 100,000 and even beyond that.

All right. And to stick with Argentina. I know it's kind of whack a mole on headlines down there, but all can discuss the removal of a 1.5% to 4% export tax out there for Argentina lithium. Can you talk through that in potential implications? Is it real? Is it not? What benefit you have from that?

Yes. Look, it is real. It's a reasonably small impact on us. I think the rebate we got last year was single-digit million. So Gilberto?

So about $1 million.

And so the impact on us is not meaningful or significant. It's just part of the development down there that we'll see continuing. I think the whole conversations in Argentina is a complicated place, as you know. And there's a lot of politics as I said, whack-a-mole on headlines. There's a lot of politics with a small pizza to work your way too. But we've been doing it for 25, 30 years now, and it's no different to how it's always been.

We'll go next now to Joel Jackson of BMO Capital Markets.

Paul, on Nemaska feasibility study, did it slip a little bit? I thought maybe it was going to come end of '22, and I thought you did order sell long lead time items. So I was wondering, did you delay that because you want the fees done before you start ordering equipment? Or maybe you can talk about that?

Sure. I'm not sure where in the world you are to give us a good morning Joel, but...

All right, I'm in Toronto. Happy Valentine's Day, Paul.

It's always morning in Toronto, something like Look. But 2022 was never on the cards, right? I think the original numbers we were looking at for the hydroxide plant was 2020, 2025, and now we're saying we'll be producing in 2026. So little different. So no change at all there. I think what has changed is the fact that we're now -- we would -- our original intent was given the timing to sort of produce spot concentrate or not selling any spot concentrate.

But now we frankly have just changed that plan and said, look, it makes sense just for a couple of years to self-port concentrate because we can get Whabouchi up and running much quicker than I want to get back and running. So is it really a plan change? It's not a construction plan change. I think it's a slightly different commercial plan change. But in terms of the asset development plan and progress now that it hasn't changed.

Okay. And then we've obviously seen -- excuse me, a really big equity stake by GM recently have another mining project in the continent. And you got a prepayment situation with GM. And I think you talked about before that maybe as you get in the mask advance a bit maybe GM or others could be involved here. As you think about how you're going to finance the mask and your partner IQ, you spoke about a little bit earlier. What are kind of the most likely scenarios there of paid-for capital, government subsidy, there obviously seems to be way more bucket of money, a much larger bucket of money available in the States right now, some projects, and it seems like Canada is behind a bit.

It's a hard one to answer. I think, though, you're hitting on the right point. There's no doubt that the more progressive forward-thinking customers are definitely the ones that have got most scared by the realization that there won't be enough lithium to go around, they're trying to figure out how they can use the capabilities to help develop assets. It isn't just money. Money is helpful, of course, but you can frankly solve that by coming through a really high price, and we will finance things ourselves. But I think providing money upfront, providing help with whatever it may be, construction resources, engineering resources, not everybody needs it, but some people do.

And so I think there are definitely auto companies out there willing to provide help, governments, the same governments are trying to incentivize investments that align with the broader policies with regard to what they want their industries to be. You've seen the U.S. government, of course, give out some pretty significant grands, largely technology or resource development focus, which is the first wave, we'll see where we go after that.

Canada is a long way behind, but, frankly, so is everywhere else in the world. So I wouldn't be up on Canada and Canada's demonstrated its willingness either at the federal or at the provincial level to provide meaningful support to these projects in terms of financing from multiple pockets but also in other ways, whether it's helping with permitting and other areas. So I think there will be continued evolution of the question of who provides the financing, what it looks like and what do -- if it's customers or governments, what do they get back in return. But I think they'll be an important part of the development of our industry, particularly, as you said, in North America.

We'll go next now to Pavel Molchanov at Raymond James.

Lots of interest, obviously, in the hydroxide demand. Can I ask about butyllithium? Smaller slice of your revenue mix, probably not as . But what are you seeing in terms of demand these days?

Yes. Butyl is a good business. Let's be honest. It's a business we have a leadership positioning globally, and that accounts for a lot. We have a long relationship with customers. It's also got some great characteristics with regard to it's not really replaceable in most processes that it's used in and it's not a big part of the cost structure. So it's a really good business for us. It's not an easy business. It's a complicated product to make. It's very much a regional business in terms of -- historically has been a regional business as well. Its biggest issue is that butyl is basically produced with metal or lithium metal, largely, today is produced from lithium carbonate. So as carbonate prices go up, metal prices go up. What we've seen in the business in terms of growth is the business would not have made economic sense if we hadn't been able to pass on this massive increase in lithium metal prices, which we're exposed to as we buy lithium metal and convert it into butyl. And everybody in the industry is, by the way, has the same exposure to lithium metal.

And so we've been able to pass that on. And so what it's been able to do it looks like a much larger part of revenue today because it is because pricing has moved meaningfully in 2022 in that business. But much of it is cost to pass on. So the margin impact is not maybe as great as you would think as the revenue piece is. Again, it's a good business. But just a little bit of background, one of the reasons that we used to be in this business historically is that metals made from chloride we're the only producer in the world then and largely still now that's basic in chloride. So we had this reason to be there.

Today, you find yourself in a place so that you can divert that chloride to make carbonate, you can divert carbonate to make metal if you choose, butyl pricing has to be price competitive with other uses of those LCEs today, which wasn't the case in the past. It's why there's been, I think, a fundamental step-up in the scale and the nature of that business. Growth is not -- it's not a really growthy business. No, most of the applications are GDP-type growers, particularly most of the growth is in Asia. So you got to have a decent Asia footprint in that business as well. But it's -- as you can see, it's 30% of our revenue last year and this year. So it's not a business to be dismissed.

Touching on the Asia angle. Insofar as China and Asia more broadly become less dominant in battery production than they have historically. The changes in logistics around that, is that good, bad or neutral for Livent?

Look, I think this idea of less dominant is an interesting one, but I think you have to be more clear, less dominant can still be very dominant, right, because they clearly are today. I don't think the supply chains are going to be -- they're still going to be massively weighted towards Asia as a whole, for sure, when you take Japan and Korea into account, but even to China. But I do think that as there are supply chains being built outside China, they'll be bigger, right? You could have a supply chain that's ex China that might be bigger than the entire supply chain is today by 2030.

So you could have a European and a U.S. Canada supply chain lithium cathode materials cell manufacturer that's huge. It's still a lot smaller than Asia, but it's going to be huge. So we create opportunities for companies like Livent. We have assets in China, we'll continue to operate in China. But clearly, we're positioning ourselves much more to service non-China markets as they grow.

And ladies and gentlemen, that is all the time we have for questions this afternoon. Mr. Rosen, I'll turn things back to you for any closing comments.

Thanks. 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.

Thank you, Mr. Rosen. Again, ladies and gentlemen, that will conclude today's Livent Corporation conference call. I would like to thank you all so much for joining us and wish you all a great evening. Goodbye.