Livent Corp (LTHM) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the Third Quarter 2020 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, Simon. Good evening, everyone, and welcome to Livent's Third Quarter 2020 Earnings Call. Joining me today are Paul Graves, President and Chief Executive Officer; and Gilberto Antoniazzi, Chief Financial Officer. The slides presentation that accompanies our results, along with our earnings, can be found in the Investor Relations section of our website. The 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. (Operator Instructions) 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. First, I'd like to take a brief moment to thank all our employees globally who continue to effectively manage the ongoing challenges facing all of us in this difficult environment. When you take all of the distractions that our employees face today, I look at the performance of our operating assets, it really speaks to the professionalism and the commitment to the Livent workforce.

We have a lot to talk about today, including the broad EV trends that are driving optimism by accelerating demand growth, Livent's participation in a new world-class lithium project in Canada and, of course, the near-term challenges that we continue to face as an industry. I will address the current lithium market to give some context for Livent's third quarter performance. We will discuss how, despite the significant near-term uncertainty that our industry is operating in, electric vehicle demand growth is accelerating and excitement for the long-term prospects of electrification are strong as ever; also, how the wider reported expansion challenges in the lithium industry by creating a looming supply deficit for all forms of lithium chemicals, whether that's carbonate, hydroxide or even metal, in the longer term; and most importantly, we will discuss what Livent is doing to strengthen its market position over the coming years.

The lithium market has been weak through most of 2020 with China being impacted in Q1 and the rest of the world rapidly feeling the effects starting in early March of this year. Despite the reopening of many of our end markets following shutdowns in Q2, the pace of recovery has been gradual and uneven with a lack of real visibility into how the end consumer is going to behave and, therefore, limited confidence as to the shape and strength of the recovery. Many customers continue to be focused on managing costs, reducing inventory and minimizing order volumes beyond what is needed on a short-term basis.

This dynamic has resulted in lower demand across all lithium products and end markets from high-growth energy storage to various other industrial markets we serve. Despite this environment, we still expect total demand for lithium chemicals on an LTE basis to be flat in 2020 versus 2019, which speaks loudly to the underlying growth dynamics in demand for lithium.

There had been some particularly impressive electric vehicle sales data around the world in the midst of this broad economic slowdown. In China, which is further along in its COVID-19 recovery amongst other countries, passenger electric vehicle sales were up nearly 70% year-over-year in September. This marked the highest number of monthly EV sales since June of 2019, the last month before the Chinese government reduced subsidies. This is a very important achievement as moving from subsidy-driven sales to a more sustainable sales trend is a critical step in the evolution of EV adoption.

EV sales also climbed increasing nearly 70% month-over-month in September or 170% year-over-year. And even in the U.S., which is lagging both regions with respect to EV adoption, September marked the strongest EV sales month year-to-date and the first positive year-over-year month in 2020. Putting all of this together, 2020 total EV sales are on pace to be higher versus 2019 despite what will, in all likelihood, be a down year for the overall global passenger vehicle market.

Demand growth is key to the return to sustainable profitability for the lithium industry and, even more important, if we're going to create the conditions necessary for expansionary investments. As we have previously discussed, the lithium industry entered 2020 in a state of oversupply, albeit with a wide range of quality capabilities on the supply side. The recent upturn has been positive in one sense and that it's helped to get more agreement on projecting the point of which supply and demand will return to balance for certain key products. However, it will take time for lithium demand to fully ramp back up, for visibility and confidence to be restored with customers and for OEMs to take the steps necessary to secure long-term lithium supply commitments.

I will now turn the call over to Gilberto to discuss our financial results and provide a business update.

Thank you, Paul, and good evening, everyone. Livent's performance for the quarter continue to be negatively impacted by COVID-19-related eruption, as shown on Slide 4.

For the third quarter of 2020, we reported revenue of $73 million, adjusted EBITDA of $1 million and $0.05 adjusted earnings loss per diluted share. Revenue was higher on a sequential basis versus the prior quarter driven primarily by an increase in hydroxide volumes sold of nearly 1,000 metric tons. Despite this increase, hydroxide volumes were still down on a year-over-year basis.

Pricing was slightly down quarter-over-quarter, largely reflecting geographic mix, and most notably, high lithium hydroxide sales into China. Lower adjusted EBITDA was driven by meaningful cost headwinds we incurred during the quarter, namely higher third-party carbonate usage and increased spending due to COVID-19.

We carried forward roughly 4,000 tons of hydroxide into 2020, much of it produced from third-party carbonate in order to meet higher volumes projected by our customers. The timing of specific customer deliveries resulted in an outsized impact this quarter. For perspective, the financial impact of third quarter carbonate usage was nearly double of the prior quarter. We now work through the majority of this higher cost inventory.

With respect to COVID-19, we have been committed to ensuring our manufacturing sites continue to operate safely and with minimal disruption. Our continued work and engaging of local authorities since the onset of the virus, particularly in Argentina, has allowed us to remain operational. However, in order to implement the necessary safety protocols, we are incurring higher costs at all of our production sites. This additional spending is obviously not only the impact of pandemic on our business. We have been impacted by the late customer orders, not just for hydroxide but also for butyllithium, where more customers have had prolonged shutdowns. We have also had higher unit costs from producing lower hydroxide and carbonate volumes, to name a few.

As long as these extra COVID-19-related precautions remain in place, we expect the higher operating costs to remain. Last quarter, we discussed many of our customers' intentions to honor their full year volume commitments in 2020 and to pick it up in volumes it will require in the second half, particularly in the fourth quarter.

Now in early November, and led by lithium hydroxide, we still expect there to be a continued sequential improvement in volumes in the fourth quarter, as customers continue to express their intent to meet their volume commitments. However, due in part to the potential risk of further business disruptions for resurgence of COVID-19 cases and restrictions across many countries, the size and timing of this increase remains less certain with the possibility of some volumes pushing to January.

With the uncertainty COVID-19 has brought to our customer order patterns, we continue to adjust production plans at our manufacturing facilities, aiming to both reduce inventory of finished products and minimize additional third-party carbonate purchases. This approach has contributed to our decision to pause lithium hydroxide production at our Bessemer City facility in North Carolina for 2 months in the fourth quarter. During this period, we will be installing additional capabilities in our hydroxide unit. These top upgrades are being done to meet increasingly tighter specification requirements from our customers.

As we have discussed, the qualification process for battery-grade lithium products is lengthy and challenging. And the physical and chemical specifications amended vary by customer and continue to evolve. By using this time to improve our production capabilities, we will continue to be an industry leader in battery-grade lithium hydroxide.

In addition to our work with customers to meet their technical expectations, we have also been negotiating with them to ensure that we can continue to meet their lithium needs that underpin their long-term growth plans. As part of this, we have announced the expansion of our multiyear lithium hydroxide supply agreement with Tesla through 2021. This will result in a higher committed volumes to them versus 2020. We continue to discuss the framework for a long-term supply partnership with Tesla beyond 2021 and do this as an important step in helping to bridge the gap as we strengthen our long-standing relationship. With that, I will turn the call back to Paul.

Thanks, Gilberto. So let me start by reiterating the importance of what Gilberto finished with, and that's our continued partnership to supply Tesla with lithium hydroxide in the context of a broader discussion we have with them about how and where Livent can best support their needs beyond 2021. Tesla remains a clear leader in the EV industry and, increasingly, in the battery industry, with a vision, a technology road map and global investment plan that posted at the forefront of EV adoption trends. They continue to innovate in all aspects of electrification, and we're proud to be their partner and support their plans to diversify battery technologies, support investment into a more regionally diverse set of lithium resources and improve the sustainability profile of the EV industry through technological innovation, resource diversification and supply chain regionalization.

So moving on to the broader demand outlook. There's been heightened potential around electric vehicles, energy storage and the lithium market over the last few months. We're seeing further commitments being made by major OEMs with respect to total electrification plans despite facing significant challenges in their legacy businesses. These commitments are coming in many forms. We've seen high-profile advertising around new model launches, putting the strongest brands within OEM portfolios, such as Mustang, Hummer and Porsche, firmly into the EV space. There have been multiple announcements of large investments to either repurpose existing production facilities or to build new ones. And we've seen strategic investments in partnerships across the industry, reflecting the desire to build a portfolio of attractive EV platforms.

As OEMs put further brand equity behind new electric fleets, they're also looking to make sure the reliable battery supply chains aligned up to meet their needs. This includes having a clear lithium procurement strategy to ensure it does not become the bottleneck in production plans as OEMs go from buying no lithium today to very large volumes in just a few short years. We're seeing increased engagement from OEMs throughout the supply chain, although they remain relatively early in the process of developing their battery raw material procurement strategies. Even so, the OEMs most advanced in their electrification plants are starting to make real commitments, and we would expect to see further announcements of supply chain partnerships in lithium in 2021.

In addition to heightened concerns around securing enough reliable qualified lithium, there's been increasing discussion of localizing EV and battery supply chains. Beyond the inherent sustainability objectives, which we'll discuss shortly, there are also political and security supply considerations that have gained attention following the COVID-19 pandemic. The customers are serious about building a more secure, sustainable lithium supply chain. They will not be able to rely solely on the expansion of non-integrated China-based converters, although it will be especially true for anyone looking for both security of supply and certainty of price in the future.

In order to meet the ambitious EV targets and to avoid potential fines, the auto industry has committed $200 billion to electrification plants over the next few years. And if we add up the announced sales targets of each OEM, the implied lithium demand we're getting anywhere close to these levels would exceed even the most bullish of future lithium estimates. And while the longer-term lithium demand consensus has gradually increased, the supply side has not moved in tandem. In fact, the trend has been in the opposite direction. In the current low lithium pricing environment, the number of postponed or canceled expansion plans have only increased.

It's important to differentiate between the building of new or larger conversion facilities and the expansion or development of lithium resources themselves. Obviously, a conversion facility itself adds no new lithium to the market if it cannot get enough feedstock. The lithium resource projects, and particularly greenfield assets in more remote locations, take many years to bring online, and the financing options to fund these expansions are extremely limited today. With spodumene concentrate trading around $400 per ton and larger spodumene miners disclosing cash operating cost of production in the same range and all-in costs well in excess of this, the ability of the Australia-China resource alignment to meet all the growth in demand is highly questionable. All of this is increasing the probability of a material shortage in battery-qualified lithium materials in the coming years. And that is why Livent is so focused on its own global lithium production network. Like others, we will continue to have a strong presence in China, given that it's been the largest market for EVs and battery production, and will continue to be for the foreseeable future. However, as the lithium industry continues to grow and expand alongside energy storage globally, it will not be enough for Livent to simply build incremental lithium conversion capacity in China, even if that is the lowest capital option.

As Livent has stated in the past, while we remain fully committed to our long-term capacity expansion plans, they must be supported by a sufficient return on invested capital. Profitability needs to be higher and carry more certainty than today. The restart of our capital projects will be conditional upon improved pricing dynamics backed by firm long-term volume commitments from customers.

Now let me turn to sustainability on Slide 7, which is central to our strategy at Livent. While there was a little question about the sustainability advantages of the EVs over their ICE counterparts on a life of ownership basis, there is an increasing focus of customers and, therefore, EV manufacturers and other stakeholders and the environmental and social impact of the entire EV supply chain, especially regarding critical battery materials.

Recent discussions about the merits of localizing electric and vehicle supply chains have also brought the topic of sustainability to the forefront of our industry with a recognition that an industry model that relies on energy, water and chemical-intensive production of intermediate products and a subsequent carbon-intensive chain of shipping, process and purification will struggle to meet any reasonable definition of sustainable. We believe Livent's credentials and capabilities in this regard are a source of competitive advantage. Livent's commitment to sustainability and proven track record as a leading lithium producer for many decades have allowed us to have differentiated conversations with our customers beyond traditional contracting terms. We can point to material differences in how our process balances carbon intensity and local water issues, how we can localize key steps in the supply chain without creating carbon footprint and waste material issues and how we are making real measurable commitments to improve our performance in all areas, and current and potential customers value this.

While the shift to electrification is rooted in green principles, it does not mean that lithium producers complete -- they're immune from sustainability initiatives. When we have customers that make their own commitments to carbon emission reductions, they increasingly required suppliers who are aligned with those objectives. And if we are unable to keep up with those demands, we will find ourselves at a competitive disadvantage. Put another way, sustainability is good business, and we encourage everyone in the EV market to embrace it as a business model. And given our primary lithium source today is in a remote location in Argentina, operating in a safe and sustainable manner is essential for the future viability of our business. This responsibility is a fundamental obligation of our rights to operate.

And today, following our Sustainability Report and Green Bond Framework released last quarter, we're proud to announce Livent's commitment to overall carbon neutrality by 2040 with significant carbon intensity reductions across our global operations much sooner than that. While ambitious, we believe that this carbon neutrality goal is both achievable and necessary. Based on our successful track record of delivering on our previous sustainability goals 5 years ahead of schedule, we believe we have the credibility to set bold new goals and be a part of the process of setting standards that our entire industry is held accountable to.

Before year-end, in addition to our carbon reduction roles, we plan to share more details on Livent's broader set of sustainability commitments as we look in the future. These commitments will address all of the ESG topics that are most important to our customers, investors, community members, employees and other stakeholders.

Now let me move on to our announcement today that Livent will be a part of the new ownership group of the Nemaska Lithium assets. The Superior Court of Québec approved the acquisition proposal from the consortium which includes Investissement Québec, or IQ; and The Pallinghurst Group on October 15, and the transaction is currently awaiting the final steps needed to close. This will see New Nemaska reorganized as a private company owned jointly by IQ and an entity controlled jointly by Livent and The Pallinghurst Group.

Many of you are aware that Livent have a long relationship with Nemaska and a deep understanding of the specific opportunity that Nemaska offers. This has always been one of the largest high-grade lithium deposits in the world, and it has access to an important existing infrastructure, especially low-cost zero-carbon hydroelectric power. The Québec government has long advocated for the region to play a leading role in the future of battery materials and has backed this up with a demonstrated willingness to provide appropriate development capital. We're pleased to be working alongside IQ, the investment arm of the government of Québec, to help achieve this in lithium at New Nemaska.

As part of the transaction structure, Livent has agreed to settle its outstanding claims against Nemaska in exchange for payment of an agreed-upon portion of the $20 million plan to the new ownership group. As a reminder, in 2017, Livent provided an advanced payment of $10 million to Nemaska as part of a proposed lithium carbonate supply agreement. No volumes were ever delivered under this agreement, resulting in an additional $10 million termination penalty claim.

On a net basis, including the settlement, the upfront capital commitment required by Livent upon transaction close is small with less than $10 million net cash outflow expected in 2020 and no further commitments expected until at least the second half of 2021.

Pallinghurst is the chosen developer and operator in New Nemaska, and it is on this basis that it invites Livent to participate in a joint ownership development and operating role. Pallinghurst has significant skills and experience where Livent are currently limited, especially mine development and mine operations. It also had strong experience and relationships as an investor in Québec. Pallinghurst provides an impressive track record of responsibly developing and unlocking value in early-stage natural resource opportunities, and we're extremely pleased to be able to partner with them. However, Pallinghurst also recognizes that lithium for battery applications is a specialty chemicals market, an area where they have less experience, and we're keen add Livent's long history in this space to the development and operation of New Nemaska. Livent will, therefore, play an active role in moving the project from planning and development through construction and into commercial production, helping to ensure that all aspects of the chemical conversion operations are optimized for the most cost and capital effective mine plan.

Livent will contribute its expertise in production of battery-grade lithium materials and in the development of a commercial strategy in a complex and fast-changing market. This will include addressing matters such as the ultimate location of the chemical plant, the decision as to whether it's produce lithium carbonate, lithium hydroxide or both and identification of the potential customers that will be the best long-term partners for New Nemaska.

And following closing of the transaction, the new ownership group intends to work closely with the New Nemaska management team to undergo an optimization study, building on the important work already completed to date but without the constraints that prevented the asset from being successfully developed in the past. This will set the framework for determining the optimal path forward, and it allowed the group to make key decisions, such as with lithium products to sell, what the total production capacity should be and what the timing and capital requirements will be. The investment in New Nemaska will also better position Livent for some of the inevitable changes receiving growing support in our industry and that we have frequently discussed.

The desire amongst multiple constituencies for greater security of supply chains through, increased regionalization and resource diversification positions New Nemaska as an important lithium supplier in the future. Furthermore, the requirement for demonstrably sustainable environment-friendly production processes and the need for reliable qualified product place New Nemaska in a unique place relative to other hard rock resources globally. As a fully integrated lithium chemical project powered by renewable energy, New Nemaska will be well positioned to serve a growing customer base in North America and Europe.

And specifically for Livent, New Nemaska offers the opportunity for complementary resource diversification with our primary resource in Argentina as well as a second path on lithium chemical production. And because Livent does not have experience today as a traditional miner, the strategic partnership with Pallinghurst allows Livent to focus on its strength in downstream lithium chemical processing, while building new capabilities in hard rock mining and ultimately to derisk project execution.

But in closing, we remain excited about the future opportunities for our business and the markets in which we operate. We believe that our core advantages, the low-cost and sustainable nature of our operations, our partnerships with leading battery producers and automotive OEMs and our continued investment in developing next-generation engineered lithium products position us to be a prime beneficiary of future improvements in lithium market conditions. I will now turn the call back to Dan for questions.

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

(Operator Instructions) Your first question comes from the line of Chris Kapsch with Loop Capital Markets.

On Nemaska, can you just remind us what the scale of that project is? And does your agreement specify what percentage of the anticipated production you'll have effectively a call on? And then if there's any clarity on the time line in where you anticipate, that would be sort of on your -- on a cash cost basis relative to your existing backward integration into Argentina.

Chris, let me try and tackle some of those. I'm not going to be sure I have all the answers for you. So the issue with Nemaska, historically, frankly, was when you go in to take a close look at it, it wasn't entirely clear, to be honest, that the proposed scale of that operation was appropriate for the mining capabilities. There's an optimal mining plan, which really should drive capacity here, not how much you can sell to off-takers. One of the key questions that we and Pallinghurst are starting to tackle and will tackle is what is the right mine plan, what is the most efficient mining plan that allows us to have a constant stable stream of spodumene concentrate, how big is that. And therefore, we will have a view then as to exactly what the size of the chemical conversion facility would be.

And I'm sure you know that some of the biggest costs that you have with regard to cost competitiveness, ultimately, with these mines is the quality and the grade of the lithium spodumene concentrate or the spodumene -- or itself as well as energy costs. And so I think in both of those, it's clear that the Nemaska resource is a good, solid advantaged resources. It's got pretty high lithium concentrate to start with. And making sure that the mining plan is designed to take advantage of that is obviously important. And with the hydroelectric power and the low-cost power that comes in that basis, it's also going to be well placed on the energy side as well.

I think also fundamentally, being relatively close from the chemical plant next to the mine also helps certainly efficiencies with regard to shipping and transportation, et cetera. We wouldn't be doing this if we didn't think this would be a cost-attractive asset. Getting the answers to those questions, though, is what the optimization study is about. And we definitely want to do it as quickly as possible, but it needs to be done pretty thoroughly. And so one of the reasons that we don't believe there will be -- pretty sure there'll be no more capital needed into this plant -- into this project in the next 6 to 9 months and maybe a little longer. It will take us probably that long to actually complete the optimization study. At that point, we will have a clear idea of the answers to some of those questions that you just asked, Chris.

Okay. Well then, the follow-up would be, as I recall, that project is kind of -- there was the carbonate project and then there was a conversion facility, which you referenced. And I think that was a bit of a science project, and you were going to get the agreement, I think, and this may have even predated Livent's concluding IPO. But you were going to -- if I remember correctly, you're going to get hydroxide, convert it back to carbonate before you then convert it to your -- to hydroxide in your facility. So just -- I guess the question is, is the intent to still go forward with the conversion, the downstream conversion part of this overall New Nemaska? And then will this -- do you anticipate the commitment to this project both influence the time line, do you anticipate, of your further expansion of the Argentine project?

The process that the old Nemaska management team were trying to put in place is not one that we would have put in place. But frankly, I wouldn't describe it as a science project, but we weren't as confident as they were that they would be able to produce usable lithium hydroxide. And so because that process created lithium hydroxide solution, first, we said, "Look, before you actually create the hydroxide in usable powder form, the carbonate -- and we'll take carbonate instead," because, frankly, that was more of use to us than poor quality or unusable lithium hydroxide.

That is not the plan that we have today. We believe that the right thing to do with this project is to find a reliable, predictable process by which lithium chemicals can be produced. You have to make it through reliable, predictable and that the quality is good. I think some of this will be driven by customers. And when we get a better understanding of which customers make more sense for this resource and who's the best fit with it, I think you will answer that question whether we need to go down -- which path we need to go down. We're open to all questions with regard to technology, but it has to meet -- we're not in the business of innovating for the sake of innovation. This is a resource that has to be up. It has to be running, and it has to produce the best quality product at the lowest possible price period.

Okay. And anything on the influence on the time line of your Argentine lithium project?

I think it's somewhat independent question for us. I think the 2 biggest factors in Argentina are the challenges of operating in Argentina today, particularly with the COVID restrictions they have, but also getting some visibility as the broader economic policy down there and, frankly, access to capital. I think it becomes a capital allocation conversation, then clearly, this will influence it. I don't think it will influence it in any other way. Argentina remains, in our view, one of the world's, if not the world's best source of lithium carbonate all factors considered, not just cost, but also on sustainability and other factors. And so we're absolutely committed to still expanding that, but it's not an easy process, and we are not unlimited in our capital capabilities.

Your next question comes from the line of Chris Parkinson with Credit Suisse.

Great. You mentioned a bunch of new EV programs. But think you forgot the G-wagon on your list. And your belief, and I think most people believe that, overall, because of all these announcements, OEMs are going to need to further commit to supply agreements. But I'm guessing that's still going to require much higher price points and send suppliers to ultimately resume along their project. Can you just update us on your broader and general thoughts here?

Sure. How long we got? Okay. I better be quick. Okay. I think it's a difficult one, right, because there's a lot that an automotive OEM has to resolve in order to successfully launch an electric vehicle. And I think some of the comments from the leaders of some of these OEMs reflect that channel that they face. A lot of the schools they've built up over many, many decades aren't necessarily relevant here. But where they do have skills, they tend to apply them here, and there's a history of sourcing resources in a particular way. And so the starting point tends to be aligned with that approach, a historical approach to resource, for most, not for everybody, but for most. And I think they, therefore, have to go through the process of understanding why just simply allowing market forces to initiate and trigger lithium production is unlikely to be successful, whether it's the ship -- pace of growth, what was the lack of capital that we actually have to do that as an industry across the board or whether it's other factors that are at work.

And so I think the second thing that really matters, like a factor that plays in as well as really an urgency for some of them today. So for some, there's more of an urgency, but for others, there isn't because they're frankly not using a lot of lithium. And if you look out a couple of years and say, "We've got time to deal with this." The more time you spend with them, the more they appreciate that they actually don't have a lot of time to deal with this. And I think they're starting -- some of them, at least, are starting to realize that waiting will potentially lead you on the sidelines, and it will lead you with an incredibly volatile price. And I think it's not just higher prices. We do need higher prices than today to return to expansion.

But what we really need is commitments. We really need commitments to volume and commitments to fixed prices, particularly those of those that are integrated so that we can actually finance them. I mean we're not looking here to do anything crazy. But you can imagine turning up to most providers of capital with the trends that you've seen in our industry in the last year or 2. It's not the easiest place to go and build a case or capital raises. And I think the biggest role that the OEMs can have, and maybe even the battery producers, too, is to bring some clarity to the volume and the price bands that look lithium is likely to be valued at. And if they can do that, then I think it becomes much easier for us to start the resource development processes again. But this degree of sheer volatility and, frankly, a desire to take the lowest possible price while we can, regardless of the consequences is not going to serve the industry well, frankly.

That's very helpful. And just as a quick follow-up, just could you remind us -- if and when you resume certain projects and make that decision, can you just remind us of what CapEx requirement that's going to require potentially '21 and just a broad thought process for '22 as that progressively ramps? That would be incredibly helpful.

Sure. Sure, look. As we sit here today, Chris, I don't expect that there'll be any capital deployed in 2021 down in Argentina. I don't think the pricing environment is going to support it. I'm much sure that right the Argentinian political environment will be much clearer during 2021. Now I say this today in November 2020, and maybe 6, 7 months from now, we'll have a very different perspective. And even if I do, the thought that we would be deploying a lot of capital that quickly into Argentina, I just do not think that is the most likely outcome today.

We are sitting here looking at multiple ways to start. Again, I mean, this is a program and a plan being an existing resource that we have lots of options as to how we do it, the pace that we do it. We could frankly roll together 2 phases and go bigger. We could phase it and stage it more and start to maybe increase production of LCEs in various forms, chloride, for example, first, and carbonate to follow. All of that is on the table, but it's largely going to be a reflection of the Argentine environment and the support that we have down there in Argentina as well as how confident we are with regard to pricing and volume commitments from customers.

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

Paul, you know what I know the Nemaska story quite intimately, unfortunately.

You do. You do.

I do. I've been there. So obviously, you had a claim against them. You got the stake somewhat in lieu of that claim. I understand. Is this basically go back to the drawing board and say, "Okay, the original hydromet plant, we don't think that works. We're going to go back with at all optionality here. Maybe we'll do just like a Chinese conversion plant there, soda ash, sulfuric acid, do new environmental studies, go right back to the beginning, put the plant in Whabouchi, not Shawinigan. Like I mean, is that the way to think about it? This is a totally, let's go back to scratch, go back to square one, see any good value out of it?

Not quite square one. Look, I don't think, for one moment, that what Nemaska did was all entirely useless. I think they actually did a lot of really good work, and they've made some valuable investments in there. But I think Nemaska had a couple of issues behind it, frankly, Joel. Well, let's 3, to be blunt. The first issue, I think, that they had was the financing structure, clearly, and that's what drove them into this position.

I think the second is that -- and maybe linked to that is they allowed themselves to be overambitious as to what that mine was actually capable of in terms of production. And so they ended with a mine plan that was creating higher capital spend and a whole bunch of issues with regard to its functional capabilities to operate reliably as a mine, particularly in that relatively harsh environment up there.

And then the third area was the entire strategy with regard to the chemical conversion plant. I don't, for one minute, think the hydromet capability of technology is not something that could work. It could. We absolutely would love it to work if we can make it work. But we have to get confident that it is going to operate at an operating cost that makes sense. It's certainly more capital-intensive, but it does have some pretty significant environmental benefits.

I would also say, just to give you an idea as to the challenges, as to that process, it almost certainly doesn't feel like the location that they've selected for it is actually going to work for it for a whole bunch of geological and engineering reasons. And so it may be that unless we change the technology, the plant couldn't even shoring even if we wanted it to. And so there's a lot of questions that have to be answered. So while it's not quite a blank sheet of paper, it's certainly not taking the existing plan and tweaking it. It will be a much more fundamental reassessment than that.

So Paul, obviously, lithium prices have been really bad this year. We're seeing on the cost curve, we're seeing a lot of pain. We're seeing all churn, we see the shift. We're seeing Oracle with negative margin. We're seeing Livent that basically nears their earnings in the third quarter here.

And so when you look at your business model and what you are -- and at this low -- at the low part of the cycle, Livent is basically near 0 or losing money. Does that make you think about you have to reorganize here so as lithium prices go through the cycle over time, and this next happens, Livent will be better prepared, not better prepared, but better organized, have a better full earnings level at the bottom of the cycle? And what would you do to achieve that? Do you think that's fair?

Absolutely. Everything you said, yes. Now, there's only so much you can do, right? The economics of resource extraction and chemical processing, there's only so much we can do. We are a low-cost producer, but we do have a cost burden of being a public company, right? If we will report it as a segment of a larger organization, we would look a lot healthier than we do today. And so you kind of got to break through all of this and get your head around what it really means if we had a lot of, for example, mark-to-market investments that we're balancing around in a quarter and you could take some extra earnings.

There's lots of noise when you try and compare lithium companies to lithium companies. However, you're absolutely right. It's hard to grow a business like ours with the profitability where it is. And so we do have to think differently about it. And frankly, Nemaska is one of those. We have been, I admit, nonconventional and somewhat creative with regard to our partnership with Pallinghurst. But it's a source of capital for us and it's allowing us to operate in a wider plane than we otherwise would have to. We would have had to incur some quite significant cost, maybe one-off, maybe longer, if we weren't partners with Pallinghurst.

The expectation, over time, with Nemaska is that we increase our ownership stake, and it becomes a fundamental part of our portfolio, giving us resource diversification and giving us a differentiated story to serve different markets. I think there's no doubt, Europe and North America are looking for supply chains that are shorter that allow them to maybe not touch every part of the world before they get to them. And so I think we're taking steps that, in theory at least, position us well for the future, and we'll keep doing that. We'll absolutely keep doing that. But frankly, everything and anything is on the table to make us more cost-efficient, to give us a more differentiated position with customers, and we'll keep doing everything we can.

Our next question comes from the line of Pavel Molchanov with Raymond James.

I thought I'd start with kind of the broader EV landscape. You referenced in the slides, Europe is recovering extremely strongly. Sales are up 3x versus year ago levels. How long is it going to take for that level of EV growth to rebalance the supply chain in your mind?

That's a difficult question to answer. Let me give you a few perspectives on that. I think the supply chain, if you just take EV demand, right, you've got to be very, very careful aggregating everything, right? So if you go look at the first part of this year, and you actually -- instead you're looking at EVs and sales in Europe and maybe even in China, and instead you look at battery deployment in all-electric transportation. It was down in the first 9 months of 2020, right?

And you can see people will ask with such great demand, why is lithium struggling so much? Because the reality is actual battery deployments globally have been down. And that's especially the case for some of the markets that are using -- that have been using lithium hydroxide, the larger battery components, for example. And so I think the first thing is a broader rebound in all of this has to start pulling demand more stronger than it has. And it's a critical thing that we need to see. We need to see more demand pulling in there.

I think the second thing is clarity around supply chains because I feel like it's -- I kind of hark on this a little bit much, but we hear over and over and over again, and we turn up to customers and there's a member of the sustainability team in the room, right, and the procurement guys saying, "We need to tell the story of sustainability, sustainability, sustainability." That's all very well, but what we have today, as an industry, designed to get the lowest possible cost at the highest possible carbon footprint . And that's a lot cost for many people. Many people will supply and buy lithium products in China at a low price. But while they think that is the answer, it's going to be difficult for a healthier industry with more predictable earnings and a more sustainable, in every sense, development path to actually start to appear, but it will. I have complete confidence that it will start to appear.

And so what I really think is needed, and I know I touched upon them earlier, but I think Tesla had a very clear vision. You can all agree with it or disagree with it, but they have a very clear vision of how they are going to produce every aspect of the vehicle, and that involves investments in certain regions, and it involves investments in certain parts of the supply chain and commitments that they will make with regard to volumes and price.

I think the rest of the industry could learn a lot from that because it is what is needed to bring certainty, to make sure that you don't get left behind. And so I'll keep saying it. They're the key factors, in my mind, that we need some more of.

That's helpful. Let me follow up by asking about the COVID related costs that you mentioned weighed on gross margin. What precisely are they? And how long are they anticipated to persist?

Yes, good question. Look, there's a bunch of them. I mean, some of them are very simple. We have significant protocols in our remote environments, particularly in Argentina, with regard to moving people around. And I'm sure you know we operate remotely. We have employees, and a lot of them on multi-day shifts. And we have an obligation to them, an obligation to the local communities, to local politicians and, frankly, to ourselves to keep COVID off that spike, and that creates some quite significant cost with regard to testing, with regard to quarantining, with regard to moving. It also requires us, in many cases, to reduce the number of people that we have up there, which has implications to yield in the production rates. Not massive, but enough that you to notice them. Now we have that at almost every site around the world. We have challenges with regard to specific costs that are designed to keep our employees safe and to keep our -- make sure we're not part of a problem in parts of the world that today COVID is maybe absent from as it is in Catamarca where we have a lot of [accent]. And so those costs are -- they're not so excessive that you can -- that would require a separate disclosure. But we're certainly talking mid-single-digit millions of dollars per year and incremental cost of running all of these programs.

Your next question comes from the line of P.J. Juvekar with Citi.

Hey, just a quick -- Paul, clarification on Nemaska. They had a unique electrochemical process to recover lithium, I guess, from -- to convert lithium sulfur into lithium hydroxide. And although ECU process is well established, it was unique in lithium industry. Was that an issue?

And then just on Bessemer City, what exactly are you doing? Are you expanding capacity there?

Yes. Okay. Good questions. Yes, it was a unique process to the lithium industry. I'm not sure most chemical engineers would describe it as a unique process. I think it's actually quite -- used quite extensively in the chlor-alkali industry.

The challenge that you have is -- in lithium is not chlor-alkali. And so it had 2 features to it that caused us problems when we looked at it from the outside. The first problem was capital cost went meaningfully higher. To build it, it was meaningfully more expensive in terms of capital.

The second is that to gain the operating cost benefits that it -- that people thought it would -- required assumptions with regard to, what I'll [lucidly] call, consumables in that process, that frankly had never been tested. And it may be that when we do our own testing, we'd agree with them. But if you got that number wrong, your OpEx would go up significantly. We're talking about membranes and other consumables, but the life of them is a significant factor in that process. And we do not believe that the engineering work was done to prove out that in fact, the operating cost would be as low as they actually expected it to be. So we will do that. We'll take a long hard look at it because, as I've said, it comes with its meaningful advantages. It has advantages with regard to how it deals with them. What the waste streams are and how it deals with them, but also its ability to tap into the unique power resource up there, which is very low-cost hydroelectric power.

In terms of Bessemer City, yes, we're putting some extra -- you know I'm not an engineer by any stretch of the imagination, but we're putting some small pieces of steel in -- and probably not steel given it's hydroxide, but small pieces of equipment that allow us to be more consistent with how we meet customer battery specifications. One of the realities of moving forward now into an industry that is more and more and more automotive-driven is that having that selection or lot selection processes or having processes that require a lot of manual intervention, it's just not going to pass the quality audits of the automotive supply chains.

And so putting in place the machinery equipment and processes that can be demonstrated to be repeatable and are auditable are pretty important. And so we're adding a few bits in machinery that force us to shut the plant down for a few weeks at a time and then spend a few more weeks starting it back up and making sure everything works. And so it's not a huge amount of capital. It's not particularly complicated technology, but it's designed to bring more efficiency, more predictability and, hopefully, greater throughput for the Bessemer City plant over time.

Great. And maybe ask you another question, sort of bigger question -- bigger picture question. Did the Tesla battery day change your dialogue with either Tesla or any other OEMS? Meaning, do they just want steady supply? Or would they be serious about vertically integrating backwards?

I think it's a great question, P.J., and I would characterize it as possible. I think it was very clear that what Tesla wants to achieve with regard to lithium supply is absolutely in the best interests of companies like Livent. It absolutely is.

Their intent and their objective, clearly, is to make sure that there's enough certainty, predictability and clarity over future needs that we can all invest and provide it. And that is absolutely what I took away from it and what made conversations with them actually have largely been about, making sure that we can provide the investments needed. I think they brought a lot of clarity to a lot of misunderstandings as well with regard to with regard to whether it's hydroxide or carbonate, how they think about supply chains. And I think the model that they have is broadly applicable across other automotive companies.

Yes, it does change our dialogue with other companies, too. Other companies do look at it and start to ask questions themselves. And I don't think anybody is going to turn around and admit that they are reacting to what Tesla said. But I think it forces everybody to stand up and make statements and to take positions as to where they are on some of these key questions that Tesla, quite appropriately, go out into the public domain.

Your next question comes from the line of Matthew [Dale] with Bank of America.

Can you talk a little bit about the type of lag you might see in your demand pull from the EV rebound? I mean, I remember hearing about some excess supply in high nickel metal cathode material as well as some hydroxide itself. But, like, how long does it take for that to burn out?

I wish I could answer that. I could point to various statistics, right? I can tell you, there really isn't a lot of hydroxide sitting around just for physical and chemical reasons. You're just not getting a lot sitting around. I can point to what appears to be in the level of new sort of spodumene concentrate relative to imports and say, clearly, spodumene concentrate inventory hasn't gone up and may have gone down. And it's not clear how much of it is usable.

And I can point to cathodes material shipments and production and see some quite meaningful movements year-over-year in high nickel cathode materials starting to happen and already happening. And I can point to, with our typical appreciation of 1 or 2 supply chains that take somewhere in sort of 120 to 160 days from the lithium leading our factory to finding its way into a salable vehicle. But putting all of that together to tell you that it's going to take 3 months and 2 weeks and 4 days for the product to be pulled through, it's just importing, not that easy to do so I don't know.

I think our experience has shown, that when it rebounds, it happens -- it tends to happen really, really quickly. And so it will probably come on pretty quickly and as a surprise when it does. I'm not sure we'll have a huge -- we don't have visibility today. That's for sure. I'm certainly not looking forward with getting very clear indications in the medium term ahead of me in the next few quarters. But that doesn't mean it can't happen really, really quickly because they have in the past.

Yes. No, I think that's fair. I appreciate the color. And the Bessemer City outage in 4Q, is that going to impact your cost structure, your operating leverage in 4Q? And then as we look at the declining third-party product usage, will that be as a tailwind quarter-over-quarter? I just think about your...

Yes. Yes. The -- there will be some costs. You're absolutely right, going through in Q4. You want to shut the plant down. We'll have some one-off costs related to that. I don't have them to hand right now. I'm sure if you put a call into Dan afterwards, he and Gilberto can help you take that and model that. And the same is true for carbonate cost as well. I don't have the exact number, but it will be a helpful position for us in Q4 for sure.

Your next question comes from the line of Mike Harrison with Seaport Global.

I was wondering if you could talk a little bit about the conversations that you're having with customers around contracts for 2021. Are they giving you pressure on pricing? Are you getting any traction with the idea that they need to allow for reinvestment economics? And are they looking for more short-term contracts than you would prefer? Or are you still seeing interest in longer term on those contracts?

I would say there are probably more conversations today happening with traditional lithium purchases around longer-term fixed price contracts than we've seen a long time. And I sort of half laughed because that tells me that they think this is the bottom, right? If they're all trying to now lock down the place for the next 3 years, then clearly, there's an expectation there. They're not necessarily the ones, though, that I think you're talking about because I think when you get into the really big users, the guys that today might be using 1,000 or 2,000 tons of hydroxide but not buying it, but in 3 years' time, we want to be responsible for buying 25,000 tons a year of lithium hydroxide, they're still trying to figure this out. Like there is absolutely no doubt that when you run through reinvestment economics with them and you explain to them cost structures and capital costs and go through it in a great deal with them. They largely get it. They largely get it. But they would also say to you how much am I supposed to go to my organization when I see your [corporate] selling carbonate, I don't know what they were selling it at, $3 or $4, and I've just sign a contract for the next 5 years with you, Paul, in the mid-teens.

It's a difficult one for them, right? It's a difficult internal process for somebody who may fundamentally understand and agree that to secure the supply that they're responsible for at a price that is reasonable, then they're going to have to pay a premium to what people perceive the price to be today, firmly believing that, over time, it will be demonstrably lower than what they would have otherwise paid by riding this volatile price structure over that same 5-year period.

So they do understand it, but I think these are not fast-moving organizations in my experience, and they have to go through their processes to get to that decision-making point. And they are a lot further down that process today than they were a year ago. I see that process accelerating in these organizations. And slowly but surely, decisions are being made.

All right. And then in terms of the 2020 volume commitments that you have from your customers, it sounds like you expect most of them to still honor those commitments. Maybe there are some delays and some of those volumes bleed into January, you said. Are you thinking that some of these customers could end up with volume that they don't necessarily need and maybe that's a drag on your demand, do you see, when you get into Q1? How do you think that's going to play out?

I'm pretty confident that the volume will be needed. I'm pretty confident they absolutely do. But one of the challenges in our industry today is that the reality is that we could be sort of serving our customer for 6 months and delivering it to a specific capital material maker. And then we'll get told, "You know what, we're not using those mix. We're going to look to a different one." So now we have to go through a process of qualifying with a different one and only for one.

And we also see different platforms being more or less successful in the same way. So it's not always the case that you just take the lithium and drop it to a big customer, and then they use it. They have very specific applications for it and very specific partners that they're working with and they are just as susceptible to changes in customer -- their own customers' plans as we are as well. So you will never get, I think, perfect predictability at this point in time as to exactly what the volumes are.

As these customers get more diversification over their own customers, over their own processes, it does become easier for them to move volume around. And say this 1,000 tons that we have going here, I don't need, but I'll give you extra volume here. And so what we've tended to find is these customers are, generally speaking -- first of all, they certainly need the material. And they're generally speaking, quite keen to make sure that they take the volume that they commit to for that reason, because they also recognize, once it goes, it may not come back to them in the future.

Ladies and gentlemen, this concludes the Livent Corporation's Third Quarter 2020 Earnings Release Conference Call today. Thank you very much. You may now disconnect.