Lithium Royalty Corp

TSX:LIRC

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Lithium Royalty Corp.'s Third Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 12, 2024.

I would now like to turn the conference over to Jonida Zaganjori, Vice President of Investor Relations at Lithium Royalty Corp. Please go ahead.

[Jonida Zaganjori, executive]

Good morning, and welcome to Lithium Royalty Corp.'s Third Quarter 2024 Earnings Call. Please note that our complete financial results are available on our website, lithiumroyaltycorp.com under the Investors tab and also accessible on SEDAR+. This event is being webcast live. A replay of this call will be available on our website.

Joining us today are Ernie Ortiz, President and CEO of Lithium Royalty Corp.; and Dominique Barker, Chief Financial Officer and Head of Sustainability at LRC. Ernie will begin with introductory remarks, followed by Dominique, who will provide an overview of our financial results. After the presentations, we will transition to a Q&A session where our executive team will respond to your questions.

We would like to remind participants that today's commentaries may contain forward-looking information. For more details and other important notices, please refer to our press release dated November 11, 2024, available on our website and on SEDAR+. Please note, all figures referred to on today's call are in U.S. dollars unless otherwise noted.

I will now turn the call over to Ernie.

[Ernie Ortiz Ortega, executive]

Thank you, Jonida, and good morning, everyone. Yesterday evening, Lithium Royalty Corp. reported third quarter 2024 financial results. In the third quarter, revenue declined by 93% year-on-year, largely driven by the 74% decline in spodumene prices. Revenue was also negatively impacted by Core Lithium entering care and maintenance and negative quotational pricing adjustments.

The industry continued to experience challenging market conditions in the third quarter. Spot prices approached the middle of the cost curve, and many operators are experiencing negative cash flow. In this environment, very few operators are generating sufficient returns on invested capital. LRC's structure and royalty model position us well to get through this challenging market and ultimately to deliver long-term returns to shareholders when the market recovers.

Our royalty model is inherently low cost. We only have 10 employees and cash G&A was minimal in the quarter. It also declined by 38% compared to last year. Our royalty projects are demonstrating the ability to develop and prosper over time as many continue to make strong progress. For example, Adina and Moblan are expanding resources and establishing compelling project economics.

Gangfeng's Mariana is completing construction and will be transitioning to commercial production by year-end as per their latest guidance. At the same time, we continue to face an emerging sector advancing to scale and a generally weak macro environment for commodities. Of course, China is very important in both production and consumption of battery materials, and they have had their own macroeconomic struggles of late.

That said, we are starting to see green shoots on the horizon for the key growth drivers for lithium. First, 2024 EV growth globally is still on track for growth of about 20% compared to flat to negative sales growth for the internal combustion engine. Second, Chinese auto OEMs are continuing their brisk growth. And third, stationary energy storage is growing at rates well beyond expectations, with 2024 forecast to grow by 100% compared to 2023, and that growth is accelerating.

The current conditions are also driving increased M&A activity in the sector, which we expect to further improve our portfolio over time. Rio Tinto's announced $6.7 billion acquisition of Arcadium Lithium for a 90% premium is a good example as Rio Tinto will become a counterparty to LRC in 2 projects. Additionally, Pilbara Minerals announced an agreement to acquire Latin Resources for a 67% premium, which is a monumental endorsement of the spodumene sector in Brazil, a country where LRC already holds 3 royalties.

We expect more consolidation over time and believe this will benefit LRC's portfolio via improved counterparties with stronger balance sheets that will lead to accelerated project time line. So, the extended bottoming process and price has impacted us in that some of our projects have faced less urgency to initiate commercial production and our existing producers are generating lower sales revenues and thereby lower royalty payments to us.

At the end of the day, our medium- and long-term outlook is strong and intact. In fact, our focus on ultra-high-quality projects in top geographies has borne fruit and that the projects are still progressing even with low prices. Many of our [Technical Difficulty] projects still have strong balance sheet and are moving their assets forward. That said, in the short term, our steady transition from a rich net asset value portfolio to cash flow generation profile has been delayed. We expect 2025 to be a more favorable year and to see revenue inflect higher, mostly due to volume growth, but potentially higher prices.

Looking forward, there are several near-term projects expected to add incremental revenue in 2025. Ganfeng's Mariana project remains on track to start production by the end of 2024. Zijin has essentially completed construction at Phase 1 of Tres Quebradas, but has delayed start-up of the project to 2025 given low prices.

Atlas Lithium recently received its operational permit to assemble and operate its lithium processing plant and process mined ore from 1 of its deposits. The permit was received in 14 months, which is incredibly expedient on a global basis, but a modest delay relative to initial expectations. Production is expected to occur in the middle of 2025 according to the company. And Sigma Lithium has sourced financing for its Phase 2 spodumene operation, which is expected to add 250,000 tonnes a year of additional spodumene concentrate. The plant is expected to start production in the third quarter of 2025 based on Sigma's latest disclosure.

It is important to highlight that while any addition could be subject to additional delays, these 4 incremental near-term revenue sources all lie at the low end of the cost curve. The 2 Argentina assets are brine operations with low operating costs and major producers as counterparties. Sigma Lithium and Atlas Lithium are low-cost hard rock operations in Brazil, which is shaping up to be 1 of the lowest cost jurisdictions in the world for hard rock resources.

To underscore, despite the challenging market backdrop, Lithium Royalty Corp.'s position is strong. The company is debt-free, has modest G&A spend on an annual basis and ended the quarter with $7.1 million cash on hand. LRC continues to evaluate acquisitions, but we are of the view that we hold many of the world's best lithium royalties already, and there is a high bar to preserve the quality of the portfolio.

Furthermore, while there are many lithium companies in need of capital today, Lithium Royalty Corp. can be selective, and we are currently prioritizing the evaluation of opportunities to assets that would add near-term cash flow to LRC or are highly strategic in nature. We remain committed to growing shareholder value and we'll continue to navigate the challenging market backdrop via internal cost control, continued market awareness of royalty opportunities, all while our portfolio continues to mature to prepare for the upcoming revenue inflection of our business.

I will now pass to Dominique, who will discuss our financial results.

[Dominique Barker, executive]

Thank you, Ernie. Our royalty revenue this quarter was $224,000, down from $1.6 million in the previous quarter and down from $3 million in the same period last year. The main reason for the decline is the year-over-year number is a 74% decline in spodumene prices and the stop of production at Core's Finniss Project, which carries a 2.5% gross revenue royalty. The main reason for the decline quarter-over-quarter is related to Core, but also related to quotational pricing, or QP, adjustments that impact prior periods going as far back as Q4 2023.

As a reminder, QP adjustments relate to shipments that have been made in the prior quarters where the shipment has not yet been finalized. We use the price of lithium at the end of the reporting period to estimate our revenues. And if a prior period shipment remains outstanding and lithium prices change, we can expect a QP adjustment. As long as the shipment has not closed, we mark-to-market those tonnes outstanding.

Our South American segment has been the greatest source of QP adjustments to date. Constituents of the South American segment have recently diversified their buyer list and improved their own contracting terms. So it's fair to assume that we expect to have less exposure to QP adjustments going forward.

General and admin expenses were $1.3 million in the quarter versus last quarter at $1.4 million and $2.1 million in the same period last year. Excluding noncash items, cash G&A was $836,000 in the quarter compared to $874,000 in the previous quarter and $1.2 million in the same period last year. We are focused on managing our costs as an organization, and we will continue to be vigilant over the balance of the year.

As a royalty company with minimal overhead, LRC is well positioned to continue to navigate the current downturn. Unlike operating mining companies, we have a slim cost structure. As Ernie said, we've got 10 employees and our annual cash G&A is capped at -- is targeted at $5 million or less. We currently do not have plans to add any additional headcount, and we will remain focused on cost as an organization in light of the current market conditions. LRC's adjusted EBITDA was minus $1.1 million in the quarter compared to $138,000 last quarter and $1.3 million in the same period last year. The reason for this decline is as described for the revenue earlier, partially offset by reduced G&A.

With regards to liquidity, as Ernie noted, we had $7.1 million of cash at the quarter end and no debt. On our last call, we commented that we would remain prudent to maintain a strong balance sheet, and we do remain committed to that approach.

We also highlighted on our last call that current market conditions would lead to aggregate production to moderate, given lower or negative cash margins at many producers. We have seen several leading producers in Australia, Zimbabwe and China announce production curtailments. We expect additional sources of revenue in 2025, including from Atlas' Das Neves project in Brazil, Zijin's Tres Quebradas and Ganfeng's Mariana project, both in Argentina, and Sigma's Phase 2 expansion. Additional catalysts next year include Core Lithium's restart study, which is expected in early 2025 and potential positive impact from Rio Tinto's ownership of both the Galaxy project in Quebec and Mt Cattlin in Australia.

I will now pass it back to Ernie for closing remarks.

[Ernie Ortiz Ortega, executive]

Thank you, Dominique. I will now discuss key drivers underpinning the current state of the lithium market. Lithium demand is still growing at a robust pace with global EV sales on track to increase by 20% compared to 2023. That said, the rate of growth has slowed in 2024. Slowing growth rates, coupled with supply additions that were financed during the run-up in prices in 2021 and 2022, have led to a short-term oversupply and pushed prices to the middle of the cost curve. We believe that current pricing conditions are unsustainable for an industry that is expected to grow by north of 20% in 2024 and with a potential acceleration in the years ahead.

Despite the challenging conditions, we see several positive dynamics. First, over the last few quarters, we have seen substantial production cuts. In Australia, which produces approximately half of the lithium feedstock globally, 6 of the 9 operating mines have announced plans to either enter care and maintenance, reduce production or delay expansion. In Zimbabwe, we've seen nontraditional sources of supply such as petalite exit the market. In Argentina, we've seen delays impact several operators, such as with our Tres Quebradas royalty.

Lastly, SMM reports that since the lepidolite production peaked in June 2024, production has declined by 49% through the end of October. These supply cuts are substantial and with times to be more acutely felt in the market. Several market analysts have already reduced their oversupply estimates substantially. A leading sell-side analyst has recently estimated 99,000 tonnes of LCE production has been cut on a year-to-date basis.

Second, demand for electric vehicles remains robust and is 1 of the only growth stories in the automotive sector globally. Passenger vehicle sales are trending flat in 2024, while electric vehicles are forecast to grow by approximately 20%.

Third, the energy storage sector remains underappreciated by the market. Many of the world's leading energy storage companies have reported growth rates in excess of 100% or substantially higher than the current consensus. Sungrow Power Supply in China announced energy storage shipment growth of 144% in the third quarter and raised the 2024 shipment target to 140% year-on-year. Tesla is guiding to volume growth in the storage business in 2024 of over 100%, while commenting it is growing like wildfire. Panasonic recently commented that their energy storage systems product line was growing by 80% year-on-year, driven by data center demand. Energy storage is on track to make up roughly 15% of global demand in 2024 and is continuing to outperform expectations meaningfully.

To summarize, the industry is rationalizing supply and helping to reduce industry surpluses. Pricing is at the middle of the cost curve, and this likely provides a floor given how many participants are struggling at current market conditions. Demand growth of 20% for electric vehicles has been strong, especially considering elevated interest rates, unaffordability concerns for EVs and generally pessimistic attitude towards auto sales as a whole.

Looking ahead, global central banks have entered an easing cycle, OEMs are releasing several affordable and attractive electric vehicles and the EU CO2 emission standards are set to take effect next year. All of this should help catalyze EV sales growth in 2025. Irrespective of current market conditions, we are building a business for the long-term, and we are very encouraged about the progress of our royalty partners and their key assets. We are confident that demand for lithium will remain strong and continue to grow. LRC is well positioned to capture that growth and deliver value to shareholders given our unique position as the leading royalty company in the sector.

I will now pass it back to Jonida for Q&A.

[Jonida Zaganjori, executive]

Thank you, Ernie. Operator, we're now ready to answer questions. Can we please open up the line for Q&A?

[Operator]

[Operator Instructions] Your first question comes from Patrick Cunningham at Citi.

[Patrick Cunningham, analyst]

Just on the step down in revenue for the quarter, I think no contribution from Core that was well understood. But was there a significant step down in volume for both Mt Cattlin and Sigma Lithium? And how significant was the quotational adjustment sort of quarter-on-quarter there?

[Dominique Barker, executive]

So just on the quotational pricing adjustment, it was a material headwind in the quarter, and that was attributed to our South American portfolio. And so we faced several quarters of adjustments and ended up having a true-up in the third quarter. That material should lessen going forward. That partner said that they will be diversifying their customer base going forward. And we're happy to walk you through the mechanics going forward. And so, the volume decline, there was not much volume decline at Mt Cattlin, and there was minimal decline in our South American portfolio. It was really the core volume that was the big impact on the volume side.

[Patrick Cunningham, analyst]

Great. That's very helpful. And then, just on a couple of assets, any sense on the timing for the Adina asset and how quickly that can get to market? And I'm wondering if you have any update on the Horse Creek asset.

[Ernie Ortiz Ortega, executive]

So Adina did release their scoping study, and I believe they're commenting that they're aiming for production start in 2027 or thereabouts. So, of course, that's contingent on financing and other outside factors. So we're staying close to that asset. Either way, we think that's very material for us because they've spoken about potentially $300 million in cash flows for that 21-year mine life, and that's just assuming the reserve is about half of the resource. So that's the current expectation that I believe Winsome has released. So we'll keep an eye on it, but very encouraging that the scoping study released that showed is a very economic mine and has a lot of support within the province of Quebec.

And with regards to Horse Creek or the Sunnova process, so they are in the process of completing their annual budget at this time. Their current goal is to produce later in '25, but we'll confirm that to the market once they've reviewed their own internal plans, and we can update that accordingly, but they're currently going through that process at this time.

[Operator]

The next question comes from Ben Isaacson at Scotiabank.

[Apurva Kilambi, analyst]

This is Apurva on for Ben. So first question, we're starting to see or hear a little bit more about competition, and we're seeing more eyes on the lithium or battery metals focused royalties. Are there any -- you spoke about deal flow a little bit. So I'm wondering how many deals or conversations have you started to have? And have there been -- have you seen an increase in the number that perhaps you're losing out on?

[Ernie Ortiz Ortega, executive]

Sure. So I think there is probably additional competition versus when we started the business in 2018, but I would say it's still fairly limited. The major, I guess, other sources of capital that we've seen from a royalty perspective, there's been 1 transaction in Brazil. And then there's also been the transaction from Deterra for Trident, which that was a diversified royalty company that had some lithium exposure. But outside of that, we haven't seen any kind of major sources of competition.

I don't think we're losing out on deals at this time. We're still the capital provider of choice for many lithium companies. And I just refer back to the prepared remarks where in many cases, we're the ones being selected. There's many companies that are reaching out for LRC's capital. But given the state of the market and just the uncertainty with time lines and many companies reissuing their time lines to market, we're also being very cautious and diligent on deploying capital to make sure that we're carefully deploying that capital. So I think it's more of us being selective, but we are extremely busy with a very robust pipeline, and we're currently trying to prioritize opportunities for near-term cash flow, and that's really driving the diligence at this point.

[Operator]

The next question comes from Mac Whale at Cormark.

[MacMurray Whale, analyst]

Ernie, you talked about demand outlook and supply curtailments. I guess, the timing is really the key issue, the relative timing. Can you quantify the rate of rebalancing in your mind or maybe how long you think the curtailments will take to bring some balance?

[Ernie Ortiz Ortega, executive]

Sure. Thanks, Mac. And that's a good question since a lot of the announcements have already materialized, but many, at the same time, haven't materialized, and we'll see this occur over the next few quarters. It hasn't been an immediate cut in many cases. Key ones that come to mind are the Pilbara Minerals cut. So that is expected to start on December 1. Then, of course, in our portfolio, we have Mt Cattlin in the middle of 2025. So -- and we had some producer in Australia earlier this week also announced a more reduced throughput.

So I think over the next few quarters, you are going to see the impact of the lower throughput from many of the operators. So you are seeing that approximately 10% of supply has been cut on a year-to-date basis. But of course, that should translate to the market in the next few quarters. So it is very encouraging that we're starting to see capital discipline across the sector. And we do think that pricing at the middle of the cost curve is helping to provide some support.

And then, on the demand side, we are still relatively encouraged given that EVs are still growing 20%. Tesla commented that in 2025, you could see an acceleration to 20% to 30% within their own business, and you have the Europe CO2 standards coming into gear. And of course, you have rate cuts and more affordable cars. So I think you're starting to see the second derivative trending in the right direction for both supply and demand. So we would expect that over the next few quarters, as we see the Pilbara cut, as we see the Mt Cattlin cut really translate into the market, that we should start to see that supply discipline take hold and show up in prices.

[MacMurray Whale, analyst]

So it sounds like in your view, like that should be a 2025 issue like an impact in a positive way? Or do you think that the actual level of cut suggest that the producers are thinking beyond that?

[Ernie Ortiz Ortega, executive]

It's hard to tell the exact timing of when that potential recovery could be. I think like I said, the second derivative is trending in the right direction. So I think 2025 should be a more positive year and especially even if you do flat prices at these levels, you'll start to see less severe year-over-year price declines in the second half of 2025 kind of regardless of kind of what pricing does. So it's hard to tell when the recovery will actually happen, but I think 2025 should be a more encouraging picture.

But as far as the precise year, I think we'll just continue to monitor the market. And as far as -- for us, we'll just continue to have cost discipline and the fact that our 4 additional revenue sources in 2025 are all at the low end of the cost curve, we're very encouraged that when you look at the end of 2025, the overall mix of our portfolio, it looks very, very favorable irrespective of what pricing is in the market, just given the low-cost position of those operators.

[MacMurray Whale, analyst]

Okay. And then secondly, I just wanted to ask about M&A impact on opportunities. Do these larger companies coming in actually reduce your opportunities or change your investment metrics at all?

[Ernie Ortiz Ortega, executive]

No. In many cases, it's quite complementary. So we've seen lots of M&A in our portfolio over the last few years. So recall, we initially owned the Galaxy mine, that was part of Galaxy and they merged and then it became Livent, Arcadium and now Rio Tinto. And then, the new lithium project afterwards became Zijin. So we've seen this iteration before. And in many cases, it's been quite complementary. It's delivered additional growth and helped unlock value. And we think that could be similar with Rio Tinto. They could potentially accelerate James Bay and could unlock the underground potential at Mt Cattlin.

And the beauty of these acquisitions is that in many cases, they're for more advanced and developed projects where we already have a royalty position. That's why in many cases, they're quite complementary. So because we're quite nimble and we can still do transactions that are earlier stage in some of these larger organizations, it tends to be quite complementary for our asset base, and it can help accelerate and unlock value.

[Operator]

The next question comes from Mohamed Sidibe at National Bank.

[Mohamed Sidibe, analyst]

Sorry, I missed the beginning of the conference. So, apologies if you already answered this. But just wanted to ask on the 3 assets coming -- expected to come online next year in 2025. [Technical Difficulty] so they just received their operating permit in late October. And are you -- I haven't seen this, but could you provide us with an update on whether or not construction has started there? And is it a 6 months, 12 months construction time line? And I know you can't probably get into details already. I just wanted to understand when and how in 2025 could potentially come online.

[Ernie Ortiz Ortega, executive]

So as far as Atlas, for any kind of specific items, we can refer you to the management at Atlas. But what they have commented to us for disclosure is that they are on track to ship the DMS plant from South Africa to Brazil in the fourth quarter and that their current expectation is to start production in the middle of 2025. In their latest presentation, they do comment that 1 of the deposits is expected to have cost in the neighborhood of $400 per tonne. So it would be a very advantageous mine and deposit with very low cost. So they have provided that level of detail. And beyond that, we can refer you to Atlas management, if necessary.

[Mohamed Sidibe, analyst]

Okay. Great. Now on the financial side, and I'll probably reach out to get more color on the quotational pricing adjustment. But specifically on the G&A level, you had a lower quarter-over-quarter G&A spend there. Can you look at the spend as maybe your running rate for the next couple of quarters in this current pricing environment? Or how should we be thinking about G&A as we go into 2025?

[Dominique Barker, executive]

Yes. I think the last quarter is probably still -- is a good run rate to use. And as you know, we do run a lean organization. If we needed to, we could run leaner. We could reduce G&A through various measures. But we feel really comfortable that even if we have a lower-for-longer environment, we stand in a relatively good position. And just on the quotational pricing, just to give a bit of a delta, the previous -- I answered the question on volume impact. The quotational pricing impact this quarter was over $300,000. So we would expect that to be reduced dramatically going forward. And we can walk you through that, Mo, on a call separately.

[Operator]

The next question comes from David Deckelbaum at TD Cowen.

[David Deckelbaum, analyst]

I just wanted a point of clarification, just to be sure. With the Bradda Head contingency payments or sort of the milestone payments based on resource, are there any other sort of agreements like that, that might be on time line for '25 or '26 where there might be some increased capital commitments on year end based on sort of exploration or resource milestones?

[Ernie Ortiz Ortega, executive]

There are some other remaining milestone payments, but they're not material. And at this point in time, we don't expect those to occur in 2025. So I would say, at this point, we expect the Bradda Head $1 million in January '25 to be the main one. But at this point, we don't expect the other milestone payments to occur in '25. And even if they did, they are very minimal.

[Dominique Barker, executive]

Yes. And I would just point to Note 18 in our financial statements that outline our commitments and contingencies.

[David Deckelbaum, analyst]

My second question was just on the brine projects in Argentina. Obviously, Mariana and 3Q looking for perhaps first volumes in '25, I guess what is your thought on the time line of selling technical grade versus battery grade for some of those brine assets? And then what you would expect in sort of the first year of those projects lives in terms of product discount?

[Ernie Ortiz Ortega, executive]

Yes, it's a good question. I think the operators themselves haven't provided that level of guidance. So it's hard for us to provide it ourselves. I would note that both Dominique and I are heading to Argentina next week. We'll actually be on site at both Mariana and Tres Quebradas, so we will gain additional insight. But I think you could probably assume that it would be a similar type of throughput and sort of ramp-up that we've seen with other potential new starts in Argentina. That's probably the best guidance that we can provide for now. And as the companies themselves provide additional guidance, I think we can certainly do so as well. And in case there's anything that we can share following our site visits, we're happy to follow up as well.

[Operator]

The next question comes from Katie Lachapelle at Canaccord.

[Katie Lachapelle, analyst]

So I was a little bit late joining the call, so I apologize if this is already answered. But with respect to Tres Quebradas, I think the last report, the start-up was imminent at that project. Now it' looking at 2025 with potentially the lag to sales happening, so you're not receiving royalties until later in 2025. I understand the company hasn't disclosed too much, but has there been some sort of critical delay that you're aware of with respect to the project or maybe some -- given what's going on with market pricing, has the company maybe been motivated to pull that back and be a little more patient with respect to start-up? Just any color there would be helpful.

[Ernie Ortiz Ortega, executive]

Yes. Katie, so it's been more of the latter, and we have a very constructive dialogue with the company. And so, construction is essentially complete, and it's really more of a pricing discussion that given the pricing levels today, there's less urgency for them to really rush to market. So it's really -- the communication to us has been that it's more pricing led. As I mentioned, we will be on site next week, so we'll get additional insight. But the communication so far has been that it's more of a pricing discussion, but that construction is essentially complete. And actually, they've already communicated earlier that construction for Phase 2 has already started. So there's still strong believers in Argentina, strong believers in the assets. It's more of a pricing decision at this point.

[Operator]

At this time, we have no further questions. I'll turn the call back over to Jonida for closing remarks.

[Jonida Zaganjori, executive]

Thank you to everyone who joined us today. This concludes our third quarter 2024 results conference call and webcast. We expect to release our fourth quarter 2024 results after market close on March 12, 2025, with a conference call held on March 13, 2025, at 9:00 A.M. Eastern. Thank you for your interest in Lithium Royalty Corp. Goodbye.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.