Sigma Lithium Corp

XTSX:SGML

Earnings Call Analysis

Sigma Lithium Hits Operational Milestones Amidst Challenging Market

In Q2 2024, Sigma Lithium demonstrated operational excellence by increasing shipment cadence to 22,000 tonnes every 30-35 days and maintaining high cash margins. Despite a volatile lithium market, the company achieved a 54% FOB cash margin and a 30% adjusted EBITDA margin. Revenue reached $45.9 million on nearly 53,000 tonnes sold. Sigma maintained low production costs, surpassing its 2024 cost targets ahead of schedule, and held a strong liquidity position with $99 million in cash. Guidance for Q3 includes shipments of 60,000 tonnes of lithium materials, continuing its strategic expansion in Brazil.

A Promising Start in the Lithium Market

In the second quarter of 2024, Sigma Lithium reported a significant increase in operational efficiency and volume, moving to a robust 22,000 tonnes of materials shipped every 30 to 35 days. This achievement reflects their growing reliability as a producer, which has positively impacted their ability to secure favorable export-credit terms. Overall, this milestone positions Sigma as a competitive player amidst a fluctuating lithium market where price stability is a concern.

Robust Revenue Performance amid Market Volatility

Sigma's financial performance for the quarter showcased strong revenues of $45.9 million from nearly 53,000 tonnes sold, translating to a CIF equivalent realized price of approximately $894 per tonne. This figure reveals the company's skillful maneuvering through adverse market conditions, maintaining a cash operating margin of about 54% and adjusted cash EBITDA margins closer to 30%. Their ability to manage costs effectively, achieving a notable reduction in cash costs by 22% to 24% relative to previous reporting periods, further highlights their operational excellence.

Future Growth and Tightening Supply Chain

Looking ahead, Sigma has outlined a vigorous guidance plan to ship 60,000 tonnes of lithium materials in the upcoming third quarter, reflecting confidence in their continuous operational improvements. This anticipated increase underscores the significance of Sigma's role in addressing the strengthening global demand for lithium, particularly as the electric vehicle market expands. Industry projections indicate that the global demand for lithium could reach 1.4 million tonnes of LCE equivalent by next year, emphasizing the urgent need for Sigma's contributions.

Cost Management and Competitive Position

Sigma's management team highlighted significant advancements in their cost structure, achieving their target CIF cost of $510 per tonne and an FOB cost of $420 per tonne ahead of schedule. These are impressive feats that result not only from stringent cost control but also from the efficient integration of new operational methodologies. The established operational culture prioritizes safety, with Sigma marking a full year without fatalities, enhancing their competitive stature within the lithium production landscape.

Liquidity and Financial Strategy

As of August, Sigma's cash balance was a strong $99 million, positioning them favorably for future investments. Their favorable export-linked credit rate has decreased significantly from an initial 15% to a current rate of 5.85%, showcasing improved creditworthiness. This strategic financial management is a proactive measure that enhances their liquidity for expanding production capacity in line with Phase 2 plans, projected to double their output in the coming quarters.

Long-Term Visions and Market Dynamics

CEO Ana Cabral emphasized the company's commitment to expanding its production capacity despite current market adversities. Their approach focuses on maintaining efficient operations while preparing for future demand surges, particularly as global electric vehicle sales rise. This proactive positioning against market fluctuations serves to reinforce investor confidence in Sigma's strategic direction and financial stability.

Sustainable Production as a Strategic Advantage

Sigma's focus on delivering the most sustainable lithium products aligns with growing industry demands for traceable and ethically sourced materials. Their operational advancements, such as dry-stacking methodology, not only minimize environmental impacts but also cater to heightened consumer expectations. Such innovative practices are likely to enhance Sigma's market appeal and brand loyalty moving forward.

Conclusion: A Strong Position for Future Growth

In conclusion, Sigma Lithium's recent earnings call reveals a company poised for continued growth and operational excellence in a volatile market. By prioritizing cost efficiency, maintaining robust liquidity, and committing to sustainable practices, they reinforce their position as a key player in the lithium supply chain. Investors can view these strategic moves as a solid foundation for long-term value creation, steered by a management team dedicated to navigating industry challenges and seizing growth opportunities.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone. My name is [ Regina ], and I will be your operator today. Welcome to the Sigma Lithium Second Quarter 2024 Earnings Conference Call. Today's call is being recorded and is broadcast live on Sigma's website. On the call today is the company's CEO, Ana Cabral; and company Executive Vice President, Matthew DeYoe.

We will now turn the call over to Matthew DeYoe.

[Matthew DeYoe, executive]

Thank you, Regina, and good morning, everyone. Thank you for joining us for our second quarter 2024 earnings conference call. As Regina noted on the call, with me today is company's CEO and Co-Chairperson, Ana Cabral. After the market closed yesterday, we published our 2Q financials, which are available both through SEC and SEDAR.

Before we begin, I'd like to cover 2 items. First, during the presentation, you will hear certain forward-looking statements concerning our plans and expectations. We note that actual events or results could differ materially from the changes in market conditions in our operations. And additionally, earnings referenced in this presentation may exclude certain non-core and nonrecurring items. Reconciliations to the most comparable IFRS financial measures and other associated disclosures, including the descriptions of adjustments, can be found in the back of the press release.

With that, I will pass it over to Ana.

[Ana Cabral Gardner, executive]

Hi. Good morning, everyone. I am very, very pleased to present to you with our second quarter 2024 quarterly results. We are actually delighted that we have managed to achieve all-around operational excellence, driving in our financial results despite what it is a lithium price environment that we just do not control. So what we're going to show in these results is that we have where we control all of our operational elements, fully managed and actually demonstrating our operational excellence.

So starting with the volumes, we further increased the cadence of volumes sold to 22,000 tonnes of materials shipped every 30 to 35 days. So that means we have achieved what we call reliability as a producer, which is linked to our ability to receive favorable rates and favorable terms in export-linked credit, meaning credit lines linked to our ability to continue to maintain this export track record.

Another very important point in delivering our strategy was the ability to continue to increase the sales price premium relative to our competitors. That's a key element of our strategy, and it's a result of increased commercial assertiveness. So as we deliver cadence of volumes, and as we are rewarded by the banking system with a more favorable credit linked to the export financing, we are able to continue to push -- continue to exercise commercial assertiveness and therefore, achieve a sales price premium. So these elements are all interlinked: Performance of favorable credit lines and then price premium performance.

On the cost front, on the operational front, we are just delighted to have been able to print one of the highest cash margins in the sector, especially when this happened against the quarterly where the backdrop of top line resulting from lithium prices wasn't -- again, something we control, but wasn't as favorable. So it means that by posting these cash margins, we do have our cost structure well under control. And that, I mean, again, we're very proud of having reached our cost targets for 2024 ahead of schedule, meaning we're now -- we continue to be amongst the lowest in the sector and we managed to print every cost target that we indicated to investors early in the year for the year 2022, and we're just in the second quarter, which just shows the direction of this trajectory.

We do believe that this is the result of a bottom-up, top-down culture. So it would be impossible to achieve all these metrics if we hadn't implemented what we call a culture of excellence and high standards amongst our employees. And that starts with a clean metric that's highly beneficial to them, which is safety. Again, we're very proud of having completed a full year with no fatalities, zero fatalities and zero accidents without loss of work, which means we send our people back to their families safe, and we've been doing that for an entire year, which is an incredible achievement for a young operation. That has catapulted us to the very top of the metals and mining industry rankings as measured by ICMM, the International Council of Metals and Mining Companies. There's just one company that ranks above us on this combined ratings.

If you could please turn to the next page. So I think the summary of where we are is, again, we were able to combine 3 attributes. They are quite unique and not easily combinable in our industry. We initiated our shipments last year in operating in large scale. We have been maintaining low production costs consistently, and we have been delivering the most sustainable lithium in the world. Our lithium became a brand for all attributes related to sustainability and traceability. Not one company in our space has able -- has been able to deliver what we call the trinity of metal producers since 2018 when our dear Pilbara initiated their operations. So 6 years had passed, billions of dollars have been invested in the lithium industry, quite a lot of hype, a massive cycle, but not one company has been able to deliver the trinity that we actually have delivered, which demonstrates how rare an achievement this is.

On the next page then, I would encourage you to look at our operational highlights. And again, I'm going to start with the slide where we implement the is culture of excellence and high standards which drive our entire performance and has been driven -- driving our entire performance throughout 2024. We're very, very proud to present this slide because the numeric quantification of our ability to operate our [Indiscernible] industrial mining facilities, adhering the highest operational standards.

We were able to surpass in the ICMM rankings dozens of much larger and much more mature metals and mining company producers, just demonstrating that we had to quickly rise to the occasion during our first year, meaning we didn't have a break and no slack was cut for us. Essentially, we had to straight out of the gate behave like a seasoned producer, commission like a seasoned producer, and ramp up like a seasoned producer. There are several operational milestones that we will be showing here today, which are actually rarely achieved by a company that is just 1 year old. And the rankings you see here are just one of these.

The next page talks about our cadence of volume shift, which, again, we were able to establish that reliable cadence of product sales, which are hallmark of the operational maturity of a seasoned producer. We have sold 52,500 tonnes of our Quintuple Zero green lithium concentrate, both in the first and the second quarter, which means we are able to manage the cadence and the reliability of our shipments. That was possible because of our enhanced creditworthiness at the end of the first quarter. So we were able to conduct what we call FOB Sales at warehouse, which, again, are a hallmark of trustworthiness and reliability between Sigma and its clients when we transfer ownership of material at port to its final client before we board the ship, which, again, is another operational milestone rarely achieved by a company that's just 1 year old.

The next page has a color coding because it just highlights 2 different moments in our 1-year history. Again, we are now a seasoned producer. We demonstrate shipment-by-shipment on this page that we have this cadence and reliability of consistently shipping 22,000 tonnes at every 30 to 35 days, which drive our export credit lines of increasingly more favorable terms and rates. And again, it underpins our commercial independence and commercial assertiveness.

The color coding demonstrates this evolution of our commercial strategy. In other words, we've gone from the first 6 months, where we had a counterparty trader that was the principal, moved into where we are today, where there are various forms of exercising assertiveness. Selling to end users, selling to counterparty, trading agents -- but trading companies as agents. And again, this last shipment, this was capped -- this 1 year was capped by sending the last shipment to Mitsubishi, which is a very large industrial cadence in Japan that just associated itself with 2 other automakers for EV strategy and EV development.

So we hit the stride. And again, we want to also leave you here with the certainty that we're going to further enhance this cadence, meaning we're targeting 60,000 tonnes of sales for the upcoming third quarter, closing on September 30, which is basically just 45 days away. This track record that we established allows us to basically tap into these leading global supply chains for lithium, again, going direct to downstream members of the supply chains because it's the result of this commercial flexibility.

One of the other points that we want to make, I mean, we are pretty agnostic as far as our client base. But typically, given that Asia concentrates the supply chain manufacturing today, we've been equally distributing our shipments up into Japanese, South Korean, and Chinese clients, which is a reflection of the industry.

The next page, again, is a derivative of the previous page. As you could tell, on the left chart, you have basically the quantification of these 2 different moments of commercial strategy. First, we had the first 6 months. And then on this page, we demonstrate where we are today, where we continue to premiumize, we continue to increase sales price premium relative to peer lithium producers. We'll be maintaining an average of 10% price premiumization today, which, again, are a result of this cadence, reliability as a seasoned producer, and then more importantly, the financial flexibility of our own credit and customer financing lines because that allows us to navigate what we call mini cycles in a cycle, meaning the purchase cycles of the spring and fall that takes place in this industry, which allow us to sell into the purchase cycle and therefore, achieve the price premiumization. So we are now able to starting to monetize gradually what turns out to be a chemically superior quality of our Quintuple Zero lithium concentrate.

And at that, we're turning to the next page, where we basically numerically demonstrate that this high quality is what drives premium pricing. But more importantly, is a win-win situation for our customers because our customers save significantly if they acquire our product even at premium prices versus the product of our competitors. In other words, our high quality is chemically measured, and it translates into these cost savings for our customers and their supply chains. So buying a ton of product from Sigma means that the client saves approximately 20% to 30% in raw materials when refining lithium hydroxide chemicals, everything else staying the same. So it's a gradual process for us to simply grab that to simply monetize a portion of that, leaving another portion for the customer in a full win-win relationship.

The next page talks a bit about the operational improvements that we have been able to effect in our green plant over the last year. I mean we're very proud of this because we keep on perfecting this plant in a continuous effort. And as you recall, it starts with -- it started with the dry stacking. So a year ago, we were barely finishing commissioning the dry stacking, which has been a centerpiece of our overall purpose as a company to deliver the most sustainable lithium materials in the world, which meant for us not to produce a tailings down, which means we dry-stack our fines and our ultra-fines produced by the Greentech plant. That means we're also able to maintain minimum levels of water usage because we reuse all that water, which in our case, comes from sewage.

Now those operational improvements translate into decreasing the shipment intervals between each boat. So the target is to get to 30 to 35 days, driving maximum efficiency of the plant and reducing the shipment intervals. And this is kind of how we are going to get to our annual guidance.

Now within the Greentech DMS, we again have been affecting further adjustments and further perfecting this plant. Essentially, we have been able to reprocess the fines that were generated in the early commissioning period, which have higher grades. They have lithium oxide grades of about 1.5%. So that means we are benefiting from a double whammy here, where the improvements in the circuit increase daily productivity. So we have higher recoveries and higher daily production, but we also utilize that circuit to concentrate material that if we didn't drive stack would be otherwise left inside the tailings dam. So by recycling material that has zero cost because it was just essentially tailings, but we had dry-stacked it, we are able to gradually increase our throughput of high purity Quintuple Zero lithium concentrate. So some of these results of this continued improvement has already been reflected in our third quarter performance, hence, the guidance -- a robust guidance of 60,000 tonnes of lithium materials to be shipped in the third quarter that we plan to hit just resulting from the work we've already done.

And I think lastly, regarding the crusher, we keep on playing around the new flow sheet for the crusher, which again, help us increase the efficiency. So the latest change in flow sheet is that we're going to create a new setup, which is in line with basically the best crusher designs in the world, the separate screens from the motor, again, improving crusher efficiency and benefiting from the customized crusher we created at the plant with -- which has 1,200 millimeters of drop crusher opening, which means less fines, which means higher yield, which means higher productivity. So that's what it all means.

Decreased cadence is a result not of one great change, but of a myriad of improvements on this plant that actually lead to our higher confidence that we'll be hitting 60,000 tonnes of lithium concentrate sales in the third quarter.

So with that, I'll hand over to my partner, Matt DeYoe, to go over our financial highlights.

[Matthew DeYoe, executive]

Thank you, Ana. So in the second quarter, we reported revenues of $45.9 million on nearly 53,000 tonnes sold, which implies a CIF equivalent realized price for the quarter of about 89 -- or $894 a tonne. The top line was supported by strong cost management, which we will get into in a moment, but our FOB cash operating margins came in at about 54%, while adjusted cash EBITDA margins were closer to 30%. Production in the quarter totaled just over 49,000 tonnes.

The company has spent energy familiar -- sorry, I'll go to the next slide here. The company has spent energy familiarizing investors with the implications of provisional price adjustments, particularly with the first few boats that shipped, and we did not have any offsetting settlements. We have taken steps to harmonize our EBITDA margins to balance out this volatility. What you're seeing on the left is an allocation of EBITDA margins for our business, assuming both settled accurately without these provisional adjustments. The full breakdown of this math can be found in the appendix, but the message here is underlying margins for the business are far more stable than what the headlines would indicate.

As the extreme market volatility of second half '23 slows and we establish a regular shipping cadence, we expect these headwinds should subside and ultimately revert as we come back from a market value.

On the right side of the slide, you had seen our FOB margins, which, as we had said, balanced out against peers with Sigma happily finding its way towards the upper end of Echelon costs. This is predicated on the hard work that I will discuss here.

I'm quite pleased to be presenting the cost slide to you this morning as the company has been able to achieve broadly our unit cash cost guidance ahead of schedule. Recall, we had highlighted the target CIF cost of $510 per tonne, FOB of $420, and plant gate costs of 3.7%. The numbers in front of you for 2Q represent a reduction of 22% to 24% from our 4Q reported levels, which is where we were when we issued this guidance. As production ramps in the second half of the year, we would expect the operating leverage to drive incremental improvements from these levels. And while ocean freight rates are subject to change, we believe we have some room for traction.

This is a reflection of overall of, I think, how the hard work has paid off on our cost structure and how we see ourselves stacking up globally against some of our peers. We will continue to work through this cost and productivity initiatives to drive home a better cost structure, and this drives -- gets back to exactly what Ana talked about as it relates to building an operational culture of excellence. And this is not our data, this is Benchmark's, but I think it's a nice representation of where we think we've set where we are delivering.

The next slide is a bit of the same view, though it's a waterfall to reported COGS. Again, noting we've removed much of the noise present in our initial quarters. In internalizing our commercial efforts and keeping a focus on productivity has not only helped us generate revenue in COGS, but it's also helped rightsize our SG&A structure, which you see on the right side. Notably, SG&A is down an additional roughly 24% from the second half of '23 levels. And as this productivity plays out, we see further proof of competitive cost position as we have said again on the prior slide as it relates to the cost curve as provided by Benchmark.

So what does this all kind of mean? It helps drive what we consider to be a highly robust cash model. So we started the quarter with $108 million in cash, which was supplemented with nearly $46 million in net revenues. Cash costs on the quarter totaled $33 million, which again represents a reduction of nearly $12.5 million from our 3Q '23 levels. Working capital did prove to be a headwind to the quarter, which was a function of 2 primary occurrences. Firstly, was a reduction to our payables of nearly $14.5 million, and the second was the delay in receivables associated with 2 of our shipments. As per the pro forma bridge, you can see that we've since received those payments shortly after quarter close. CapEx on the quarter was roughly $9 million, which represents some payments on the Phase 2 expansion, as well as some of the brownfield mine and plant investment that Ana had mentioned on the prior slides.

With that, I'm going to pass it back to Ana and we'll talk through a bit the liquidity position of the company. Ana?

[Ana Cabral Gardner, executive]

Yes. So again, just to wrap up the financial section, I mean we have a very comfortable liquidity position. I mean the consistent operational performance that Matt was described and we discussed regarding sales cadence and cost controls, all of what we described throughout this presentation translated into very, very tangible benefits for this company. In other words, robust access to export-linked credit, so robust liquidity. We have a very comfortable liquidity position with a cash balance in August, topping up USD 99 million.

Basically, when you look at this chart, if you look at the upper left chart, you can see that the short-term debt is export-linked -- is basically comprised of those export-linked trade lines, which are drawn but are entirely sitting in our treasury. In other words, we could pay them all back today if they're all due. More importantly, and that's a key point, we have decreased the cost of these export-linked credit to 5.85% total fixed in dollars, which is a very, very favorable rate for a company in its first year. And again, that's a sharp contrast to 15%, 15%, that we were granted in our very first trade line in January 2024. This very first trade line was being retired long, long ago. But it just shows the quick evolution of our robust creditworthiness as we continue to demonstrate sales cadence and cost discipline.

And that is a good segue for the following page, where we actually talk about our Phase 2 expansion and give you an update on that. First, I have to reiterate this very strong and compelling business case for Sigma to continue to push and execute on doubling its production capacity by expanding its industrial facilities in Brazil. I mean, we have a very, very privileged position in this industry, where we actually have an industrial line that delivers or that actually represents one of the lowest CapEx-intensive projects in the world. And this is actually measurable. And this is why we love these indexes because they remove the opinion out of the conversation. Mathematics is just a data, a number, it doesn't carry an opinion.

So what we did, we tracked announced projects in CapEx announcements and we calculated what we call CapEx efficiency ratio, which is essentially a division of the total CapEx of a project in U.S. dollar millions by the production capacity in tonnes for -- tonnes of lithium concentrate all around the world. And we rank at the very top of this rank, meaning we are the most efficient and the lowest CapEx-intensive project in the world.

On the left, we give you a bit more color where you can see a plotting on a 2D chart with a bubble that just gives you the size of the index calculated on the chart to the right, which again shows our little tiny index, which is 0.40 and how efficient we are. The smaller the bubble, and again, the lower the quadrant, the better the project is. So we're kind of sitting in a league of our own in terms of capital efficiency here. And again, this is a result of what I'm going to show you on the next slide. And I'll skip 2 slides and then I'll go back one second.

In the next slide, you can see the aerial demonstration of our site, our industrial side in Brazil. You have 1 square kilometer of industrial facilities here. So when you see the layout, you can see that you have in green the existing insight inside the gate or the CapEx infrastructure inside the gate. That infrastructure is sufficient to essentially support 3 production lines that have the same throughput as our first production line with 270,000 tonnes of lithium concentrate premier. So benefiting from this existing CapEx infrastructure, which cost us almost USD 40 million, we will just build -- we just need to build in order to double production capacity one line as opposed to building line plus additional infrastructure. So that lowers the construction cost significantly, as you can see on this slide, because the construction CapEx to build to replicate one production line is USD 100 million.

Now based on what I just discussed regarding trade lines, we've been using these trade lines to deploy the early CapEx required for this project because for the first 6 months to 9 months of the project, the cost of actual deployment is quite low, and we can perfectly cover that with our trade lines, which are quite robust, and with our own cash generation. And so as you can see here, we have this cash position, which keeps on getting replenished every month as we receive the proceeds of our very cadenced sales. And then we essentially have these trade lines, which are drawn, but get replenished every month with our own cash generation internally. So we have an ample and very comfortable position to continue to execute our Phase 2 expansion in the timetable that we have set forth, which is a 12-month construction period.

We already started it. So if we look at the current slide, we have works underway. We're conducting with a very important point, a very, very important point that we undertook doing Phase 1 as well, which to conduct the suppression of the -- what we call the savannah, the deserted semiarid cactus bush vegetation adhering to the very high standards of environmental sustainability. So we're doing what we call inventory of species, we're doing a fauna capturing. So if we find a fauna species which are basically reptiles, so we capture them, we inventory them, and we deliver them to the appropriate authorities. So we're doing this adhering to the very high standards globally of what we call clearing an area for earthworks, which is exactly what we did when we constructed Phase 1. So that's kind of how we operate. You can clearly see here in the pictures that work being conducted by our own proprietary team because that's an expertise we have in environmental department.

On the next slide, it's just recapping, right? Where are we going? Well, we are clearly on a very disciplined approach to reach 100,000 tonnes of lithium carbonate equivalent production essentially by 2026, one production line at a time. We showed you this site, our industrial site. We have all the area we need there. There's 1 square kilometer of industrial area. The CapEx infrastructure side supports 2 lines. And so what we're doing as a result of the lithium market environment, which we don't control, is to focus on what we control, which is to have a very disciplined approach to capacity expansion, meaning we're doing one production line per year. We're not doubling up on production lines, which basically gives us a very measurable and a very achievable construction project to deliver to our shareholders within the next 12 months.

So with that, we're going to increase production capacity to approximately 80,000 tonnes of lithium carbonate equivalent or 520,000 tonnes of lithium concentrate. We're hoping to hit that by this time next year. And then we are going to embark on the third construction, which is, again, to put another parallel third production line with the same capacity, nameplate capacity of 250,000 tonnes of LCE parallel to that. So very, very well-planned, thoroughly executed, and we're simply just replicating what we've done on Phase 1 with the same discipline, because ironically, we're always called to build these facilities when the market conditions aren't exactly bullish. So we have to exercise the discipline that has become our last name here at Sigma.

The next page essentially talks a bit about the market and gives you a bit of color of the way we're seeing things. And I want to share that page with Matt a bit. I'll comment on the slide and then Matt will comment on a few other slides. So I'll share the section with my partner here. This first slide, I'll cover that one. Essentially, it's pretty clear to all participants in the supply chain that the growth engine of electric vehicles this year is giant. China has delivered almost 40% growth in the year in helping electric vehicles all in like BEVs, PEVs sales. And China is bound to reach 60% of the global EV market by the end of the year, overtaking Europe, which means that China has -- which is a result actually of a consistent policy-making -- of consistent policy-making exercise over the last decade when China has enacted a very successful EV growth subsidy program.

And when you think about it -- and again, just to think about it, in 2019, EV sales in China were about 3% of total car sales. No one had thought that in 2024, just 5 years later, twice in a year already EV sales surpassed sales of combustion cars 3 or 4 times during this year already, meaning represented over 50% of overall cars sold in China. It's a remarkable achievement.

And at that, I will encourage you to look at the slide on the left. So the global demand is essentially -- despite the behavior of EV sales in the Western car markets, the global demand is clearly set on the path to reach 1.1 million tonnes of LCE equivalent by the end of 2024. If China continues just on the pace it is, we're going to need 1.4 million tonnes of LCE equivalent just by next year. What does that mean? It means you're going to need about 8 Sigmas, right? 8 Sigmas to reach these numbers, which is a pretty sizable number. In other words, the market is growing annually now what is equivalent to the entire size of the whole market just 5 years ago, Meaning the whole market was 200,000 tonnes LCE in 2019, and that is the volume that is added to the market in a bare case that prevails today, just basically having only China as a locomotive, which basically shows you that this market demand fundamentals are very much in there, because we never ever thought that we would see these kind of levels of lithium carbonate equivalent demand back 5 years ago in 2025. All of you remember the first time you put out the 1 million ton LCE demand for 2025 in 2019. And that was the biggest bull case of the whole industry. Well, now that's our reality. In fact, it's our bare case.

So I want to just recap these numbers because sometimes you get lost in the day-to-day of the ebbs and flows of prices and we forget how compelling the actual fundamentals of the industry are.

[Matthew DeYoe, executive]

Yes. And to build on that a little bit as we talk about some of the dynamics of the industry, we don't have a slide on this, in particular, but what we've seen is it's been encouraging is the flywheel effect lower prices stimulating demand in other markets. And I think we've seen a number of market commentators talk about the strength in energy storage, the last quarter to in Tesla's Megapack numbers over the last 2Q results kind of reflect the improved economics of energy storage projects as prices for batteries fall. And that's kind of the economics curing economics of the year.

As it relates to what we see on more of a micro level, as Ana had mentioned early on, right, we don't control lithium prices and the market is obviously working its way through a bit of oversupply over the last 12 months. But what we have also is the seasonality that's increasingly present in the market. What you see on the top of the slide here represents Chinese production growth of lithium chemicals. The growth primarily, as we've discussed over time, occurs in the summer and ends in the winter. It's not to say that Chinese production growth is not growing year-over-year, it is, and we see that, and that's obvious in all the data points. But from a market impact perspective, we know that seasonal supply ramps in the spring and summer. At the same time, when early buying pattern takes a dip and starts to then pick up later with the big pull into the Q4 EV cycle, which kind of has consistently occurred year after year, particularly into 4Q.

So as Anna had mentioned, being in a commercially flexible position to take advantage of these buying and selling windows is exactly where we need to be, which as we've hit a number of times, it's exactly a function of building on our cadence, establishing ourselves as a reliable and consistent supplier in the market, and reaping the rewards of that over time.

[Ana Cabral Gardner, executive]

Exactly. And I think just to cap the slide, if you look at the bottom slide, it's very important to highlight the volume line charts that represent what we call electric vehicles, new energy vehicles sold in China. If you look at the various colors, each color is the volume sold in any particular year. So if you look at the bottom, we started the series in 2020, and then we go to '21, '22, all the way to now, which means a very large amount of electric cars are actually offered to the customers, offered to consumers in the same buying pattern seasonality of combustion cars because consumer behavior regarding cars, regarding how their power hasn't changed, which means consumers like to buy cars in the fourth quarter, like consumer would like to buy things in the fourth quarter. That's classic retail, consumer purchasing pattern.

Now what does that mean for our industry? It means the following. The sheer volume of materials required to deliver this significant volumes of cars in one season, which is the fourth quarter season, are no longer attainable to be stopped by the participants just once a year. And this is where this premium fall stocking cycles emerge. The fall stocking cycle is the classic stocking cycle in all metals. That's why LME happens in the midst of it historically. But then the spring stocking cycle is emerging with a very clear pattern, as you can see in the data points mapped out and highlighted by Matt, because the industry typically -- the supply chain participants do not have a strong balance sheet that would allow them to just follow the EV industry into one annual restocking or stocking period.

So they distribute it throughout the year into spring and fall stocking cycles. Because again, the sheer scale of electric cars has increased so dramatically over the last 5 years, and it hasn't been matched by consolidation in the supply chain away from batteries. Batteries are consolidated, but the rest of the supply chain just isn't. It's just a small balance sheet set of participants.

So with that, I mean, I want to come up -- I want to basically close with my -- I want to present you with my closing comments. I think clearly, I mean, Sigma did not benefit from any of this execution in its valuations. I mean we're still trading like a pre-operational developer company. In other words, we are now a large producer. We reached cadence. We have creditworthiness of a very large producer at 5.8% in dollars a year, but none of this is reflected in our valuation, which still kind of looks like the valuation of a developer.

So essentially, probably that happened because we ramped up over the last year, which has been one of the most complex years for the lithium market. It's seen so much change and it's seen so much lithium price volatility. None of this we control. But what we do control our operational performance. So when measured against the 2 leading companies in our sector, clearly, no matter how you measure this, volumes or market cap, we are significantly undervalued. And we also want to take the occasion to welcome Pilbara to our neighborhood. And when measured against Pilbara, you can clearly see that we remain significantly undervalued. And we want to command Pilbara from taking advantage of that and joining our neighborhood acquiring lithium resources. We're very proud, very proud of you joining our emerging lithium valley territory. And we want to welcome to Brazil essentially.

And the next slide basically shows our transformation, right? We have become -- we've gone from a construction site, that's what we were, back in January 2023 to an industry leader. So we delivered on every single operational aspect that we had set ourselves to deliver to our shareholders. I mean, from completing construction to completing the commissioning of the Module 3, which is the first and only dry-stacking module in the entire industry, we have basically delivered on every metric. Just now this quarter, we initiated Phase 2 earthworks construction. We now also hit our annual cost guidance ahead of schedule, way ahead of schedule. So we're printing the costs in our financial statements that we guided earlier in the year. So I think the next step here -- the next stop in our sequence of deliveries will be commissioning Phase 2, which will happen a year from now.

So again, we want to thank you for the trust. We want to thank you for believing in us. We believe that this renewed wave of investments in lithium valley just corroborates what we've been saying that we're operating one of the most fantastic jurisdictions for critical minerals and industrial battery materials in the world given the overall operating circumstances of our country. And we are committed to continuing to deliver to all of the shareholders throughout the next quarters ahead of us.

So I want to close this, just moving to the Q&A.

[Matthew DeYoe, executive]

Yes. So Regina, I'm happy to move to Q&A from here.

[Operator]

[Operator Instructions] And our first question will come from the line of Steve Byrne with Bank of America.

[Steve Byrne, analyst]

Your Slide 9 that shows your monthly pricing year-to-date. Is that -- $953 million you show in there, is that the month-to-date average for August or is that July? But much more importantly, I'm curious if you're seeing any signs of price inflection, or do you see it stabilizing down there? Any signs that things could tighten? And I appreciate your comments about the world's going to need 6 Sigmas for next year just given demand growth, but there is a lot of excess inventory in China. Do you have a view that if the industry doesn't slow operating rates, which it doesn't seem like it is, do you have a view on when this inflection might occur if you're not seeing it yet? Is it just seasonality that will drive that? I welcome your thoughts on this.

[Matthew DeYoe, executive]

Yes, Steve, I guess I'll start. The data point you see there just reflects the value for August, which we have press released the other day. It's a single data point in time. It's not meant to be the average realized price for that specific quarter. I think your point, and I'll let Ana talk to all the about signs in the market, but I mean, I think if you follow some of our comments from -- or, some of the comments from our public peers, I think what you see is a situation where a vast majority of our -- the vast majority of our peers in Australia and Canada and other markets are underwater at current economics. And we know that's not sustainable. It's always hard to tell when that specifically pays out from a supplier perspective. But if you can just look at some of the reported numbers that we've seen and some of the discussions we have on cost targets, particularly from traceable sources. We know that a number of players out there a bit upside down. And I'll pass it there.

[Ana Cabral Gardner, executive]

Yes. It goes back to traceability. This chart kind of says it all. I mean you have a finite universe of producers in Australia, Canada, Brazil, Chile, Argentina, that can deliver what we call traceable supply. And traceable really needs a very low bar of like human rights at the year-ends, no child labor. We're not talking zero carbon here, right? Now that is actually the issue because as you can see, there is a gap between supply and demand at these price levels. But there are players, they are selling into this gap because they seem to have the cost structure to withstand it. And based on the data of product inflow from Africa mainly, we're led to believe that this gap today with prices where they are, has been mainly filled with what we call untraceable materials.

So this industry is now at a crossroads because you will have to collectively decide what kind of materials you want to use to build their sustainable green cars. I mean, if the industry decides that it's acceptable to use materials that infringe human rights and child labor rules and basic traceability rules to build green electric cars and sustainable electric cars. And if the industry believes that as the penetration rate increases, consumers are going to accept that, well, I think we're going to go in a certain path. But our personal view is that these traceability standards are going to continue to be highly enforced especially by industry players. And I mean across the board, Chinese battery makers, South Korean battery makers, Japanese battery makers that do deliver their materials into the top-notch supply chains into the leading supply chains in the world.

So we believe that over time, you're going to see a movement where untraceable material either complies and becomes traceable, or it just disappears from at least the EV battery supply chain all together.

[Steve Byrne, analyst]

And what fraction of global supply, Ana, would you say is untraceable? Has that happened to be higher on the cost curve?

[Ana Cabral Gardner, executive]

No. That's the whole point. The untraceable material in this current environment is coming from low-cost producers. There's now -- I think we've been seeing this quite a while in the market, but now the industry as a whole caught up with it. If you look at production inflows, there's been a whole Sigma coming out of a single African country just now. So clearly, there isn't an industrial facility of the standards that we have delivered in that one country. So it's artisanal production of lithium. Again, lithium is not rare. So because lithium everywhere, I think it puts an extra burden on automakers to enforce traceability and enforce sustainability because, again, just like what happened to Cobalt, like what happened to Tantalum before, all the way to blood diamonds, the risk is to basically kill the chicken to lay the golden eggs as consumers kind of turning, let's say, resistant towards these cars because they will be challenging their own sustainability resulting from the, let's say, traceability of the materials that go in building those cars.

And we've been very vocal about that because this is the kind of behavior that risks the entire supply chain for all of us. And you've seen more happened to Cobalt before.

[Steve Byrne, analyst]

And if I can just squeeze one in. The technology that you implemented to recover more lithium out of your -- the fines, is this something that you had anticipated in the past and just implemented, or was this just from your premium engineers figuring out a way to recover that? Does it have any impact on what you would view as your production capacity because of this?

[Ana Cabral Gardner, executive]

It does, because ultimately -- I mean, it's not anything, let's say, exceptional that we've done. What we've done is the following. This media separation method is one that's constrained by the capacity of the concentrator, the centrifugator, which in our case is 250 tonnes an hour at 100%, but the design capacity is 237 tonnes an hour. So that's a constraint. So even if I lower my lithium oxide grades, I'm still constrained by that capacity. It can only flow that tonnage of product per hour. So this is a characteristic of my industrial plant, the Greentech plant.

Now what have we learned? We learned that the higher the quality of the pre-feed into that centrifugator, into the dense media separator, the higher our recovery. So what we're doing is a very elaborate system of screens in pre-screening and preparation of the feed that goes into that capacity, which unfortunately is fixed, it can only increase with an expansion, so that I increase recovery, so I increase yield. By feeding better material, pre-purified, pre-screened material, I am able to achieve better results in the dense media separation. That's what we're doing. And we've already gotten there. Now we've hit the stride over 700 tonnes a day, which is something that in the past would have been called an exceptional day. Now this is our regular days, and we're hoping to move that further upwards to even higher levels of daily production close to 800 a day.

So that's kind of what this depuration of the feed that goes into those centrifugators do for our production throughput for our yields.

[Matthew DeYoe, executive]

Thanks, Steve. We'll go to the next one.

[Operator]

Our next question will come from the line of Joel Jackson with BMO.

[Joel Jackson, analyst]

[Indiscernible] So a bit of a tangled question. There's obviously a bit of dispute going on in some of the land inside where your reserve is or where the asset is for Phase 2. If you don't get some sort of agreement there, can you proceed on Phase 2? Would you have to move Phase 2 to a different part of the resource? What will give you confidence legally for the company that you can advance Phase 2 as designed on the land you want to do it?

[Ana Cabral Gardner, executive]

Joel, I think there's a massive confusion on your end here regarding land disputes. What we are -- the only thing that's actually in there, it's essentially an ore body that doesn't have anything to do with Phase 2, that sits between Phase 2 and Phase 3, that's independent of those 2 phases, and that has nothing to do with Sigma. So Phase 2 is to the left of the ore body and is absolutely not connected to it. So we can go about our business irrespectively of what happened there.

Now what's the most important thing is that, that area is actually controlled by me. So I have 51% of that area. It's a Brazilian corporation. So even if that were to become an issue, I would obviously resolve it favorably to Sigma. So it's a non-issue.

So going back to it, essentially, what we are doing is just proceeding with our planned business as usual. I mean we got [Indiscernible], which is Phase 2 giant ore body, which can be accessed by all sites. The mining concession belongs to Sigma, the overground belongs to a company that's affiliated to Sigma. So it's business as usual, preceding business as usual.

You might be referring to the noise my, let's say, former husband tried to make to create that sort of misunderstanding, but it's great that you raised this point, because it's an opportunity for me to clear it out for all of the participants in this conference. That noise has nothing to do with Sigma. In fact, I have great news for everyone in attendance. My divorce has been declared quite a while ago. And as you can all see, I'm still here, Sigma is still here, there's been no implication to Sigma of the declaration of my divorce, the split of the assets and business is usual for all of us. So it was just, as Shakespeare says, much they do about nothing. But it's understandable in a divorce when one of the parties is less wealthy than the other one.

[Joel Jackson, analyst]

Okay. So my next question is probably Shakespeare. You also -- it's really great on the cost targets. I think you absolutely hit the mid-'24, as you said you would earlier this year, such great. Now you also had an SG&A target that you want to hit. And obviously, when you have a downturn in pricing, you want to get lean and tight. It seems like the SG&A is still staying up there and there's also some legal costs you're having. Can you talk about what can you do to get the SG&A down more to what you want to get to?

[Matthew DeYoe, executive]

Joel, I'll take this one, right? And part of this is -- it's hard. When we brought out the SG&A guidance, it was a bit of a discussion around what we needed to sustain Phase 1 operations. But obviously, we have intention to grow. And so what we've been building is a operationally and commercially sophisticated organization to give us the platform to double capacity and to triple capacity, right? As we talk about things like internalizing our commercial capabilities, and I mean let's use that as an example, right, we've had to build out the commercial team. In the grand scheme of things, I think you can see the implications on the reduction to our sales expense on the income statement and what that means for real dollar savings, but it also means some creeping costs on the back end. But look, scale is our friend at Sigma, and SG&A is a key area where we will be able to scale as we do not need to double our SG&A to double our production capacity.

So we're kind of caught in a little bit of this framework of a growth company and trying to also be the right size for when that situation arises. But again, things like SG&A, that, on a per-ton basis, will not get fully cut half, but it'll get pretty close as we grow. And that's part of the leverage in the operating model that we really are looking forward to.

[Joel Jackson, analyst]

Ana, can I just follow up on that one more and I'll pass the baton? So I understand wanting to not give up on the growth. Obviously, we all know what's happening to spodumene markets right now and the lithium markets right now. What, Ana, would you have to see? Like would you have to see many more months of these depressed spodumene prices before you make the decision to just really lean on SG&A, cut costs where you can hold on to Phase 1, or Phase 2 is happening no matter what, no matter the price?

[Ana Cabral Gardner, executive]

Well, no, Phase 2 is happening no matter what. I think this slide that you see here illustrates that well. In other words, if Sigma cannot operate profitably, I think the whole industry is doing, right, because we're sitting to the right of green horses on top of Pilbara in terms of our low cost. So there's not a whole lot more that we can do. We're going to continue to strive for lowering costs, but now focusing on unit cost reduction, meaning as we have these opportunities to drive further up our production yields, the costs are going to go down just as a result of larger volumes being sold.

But when you go back to the project -- the Phase 2 project per se, I mean we got the liquidity to do it. And when you look at the capital efficiency of that project, it's essentially unquestionable that we have to go ahead with it. I mean just recapping the slide, there's absolutely nothing out there that's as efficient as throwing a second line and going with it. If you add the gains that we would have by fixed cost dilution to it, which we typically don't, but just doing SG&A dilution because it's a pretty obvious one, it becomes then a complete no-brainer, which we don't add to our analysis. But it's there, we all know it's there. You don't need 2 Anas, 2 Matts, 2 of the, what we call, fixed infrastructure to do what we need to do with 2 lines, right?

So as Matt was saying, scale is our friend. What we're doing to -- and you raised an excellent point, Joel, on discipline. We are phasing it. In other words, when we did the first project, and you remember that very well, we were racing it. So we're going to race versus pace -- so sorry, we went from race to get to market, which is what we did in January 2022 as we raised the capital for Phase 1. We are on rates because it was a bull market of historical proportions, and we knew we had to become operational and achieve production in scale while the bull market was happening. And we did that a year ago.

Now we measure no efforts to do it. We pulled out what we call an acceleration plan for Phase 1. That cost us $20 million extra when we were flying equipment, short-circuiting steps on construction just to get their own time. And we turned the plant on in May -- April, May '23, and by July, we had our first shipment out of the door. That was Phase 1. Now very, very different environment. So it's interesting because the environment now reminds me of the environment that we had when we were doing the detailed engineering for Phase 1, which was still during COVID, not the best part of COVID, the earlier 2020, which is a very challenging environment. So we went back to the drawing board to the project execution plan timeline that we had then, which is a 12-month comfortable, we call it 12- to 15-month comfortable, and we already started project execution timeline, meaning we're not using the acceleration budget whatsoever. So we're going to receive equipment in the regular lead times. We're going just to follow the regular trajectory of the schedule.

So it's the phased construction timetable versus the raced construction timetable because that is what allows us to actually manage the construction process in line with our own liquidity capabilities. And so far, we're doing quite well on that.

[Operator]

[Operator Instructions] And your next question comes from the line of [ Andre Krupnick ] with [ Brickwood ]

[Unknown Analyst]

Hi, Ana, just a follow-up on what you were just discussing with Joel. So looking at your financials for the second quarter, your capital spend was quite light. So when do you expect the capital-intensive Phase 2 expansion to begin? And also, do you still keep on intending funding this with sort of shorter-term trade finance lines? So is there a plan to add more debt?

[Ana Cabral Gardner, executive]

No, thank you for the questions. And this is a very good question. The cap -- typically in these constructions, the CapEx really picks up at the very end. And you can see by the previous project, right? You have a bulk at the beginning, which relates to deposits or prepayments of long-lead items. Earthworks is quite inexpensive. The total earthworks cost is $8.9 million to $9 million. And that's basically it. And so you basically pay for earthworks, paying for that engineering, and then you're depositing towards equipment. In our case, we got a break for our Quintuple Zero unique and -- unique levels of sustainability actually. Most global manufacturing equipment want to work with us.

So what does that mean? We know long -- well, and obviously, now we have credit. We are a company that has revenues and delivers cash flow. So the creditworthiness, plus our super-special Greentech plant and our green credentials, attracted some of the largest global OEM parts manufacturers to work with us on this project. So we're no longer required to pause -- not to prepay for long-lead items, which is something we had to do in Phase 1. Some of the long lead items had to be fully paid before they even began construction in their respective supplier manufacturing lines. So we're saving some money there.

So the long-lead item bill for Phase 1 was around USD 15 million. And we think the long-lead item billed here is somewhat expanded, but it will be a bit smaller than that. So as you can see, lond-lead items and earthworks are the 2 main elements of cost of this project probably throughout -- if you look at the project execution plan, as I see here, throughout third quarter, fourth quarter, we're just going to have the bigger numbers hitting us on the first quarter as equipment starts getting delivered and then you have to fully pay for the equipment. So it's kind of a back-loaded CapEx, as you can see, and we put on the screen the full CapEx, so you can see the comparison too. And you can also see, Joel's point, you see the construction acceleration plan, that was the race portion of it, which we eliminated. It's $20 million. So this time is the pace, meaning we don't have that acceleration plan in place. It's there, it's quoted, but we're not going to need to trigger it because we're just pacing it. We are in no rush to sell cheaply, let me just put it that way.

[Unknown Analyst]

And so the second part, is there a plan to take on any more debt, or are you just going to do it from the existing trade finance lines?

[Ana Cabral Gardner, executive]

Oh, no, sorry, I didn't answer that. We are in ongoing discussions with -- well, we announced it actually. We are in ongoing discussions with Brazil's Development Bank, BNDES. BNDES has embarked on a very successful new industrialization drive in Brazil. We are part of that. It's centered on bringing industry green producers on generation of industrial jobs. Just to put in perspective, Sigma just created an entire territory in the poorest region of the country. We have about 13,000 direct and indirect jobs there, 1,500 direct jobs. So we are top of the line on the new industrialization development plan of Brazil, and we're bound to -- we applied for a USD 100 million credit line with BNDES, which is going incredibly well because we sit within that framework of industrial policy. So that will be the primary source of funding. The duration is exceptionally benign because it's development bank credit. So it's longer than 15 years. So it's a spread-out duration. Rates also are very favorable. Today, that line would have rates of about 8% in local currency, which are even lower than our current dollar-denominated rates. So that will be our primary source of Phase 2 funding.

And then in parallel, what we're also doing, just to show how active we've been on managing our capital structure for the current environment, if you look at our liquidity slide, you can see that we got long-term shareholder debt, which was that debt was generously given us by our shareholders when we were still pre-operational, right? So this debt has restrictive covenants. It has a higher rate. So we're also in active dialogue with the banking community to conduct liability management on that debt, where we're planning to replace that debt. Even though it's benign is maturing in 2026, and it was given to us by our shareholder, we're planning to replace that debt with commercial banking debt as well. So we're very active in the debt market as we speak at the moment.

Development bank debt, duration of over 15 years for the actual cornerstone centerpiece of building the plant. And a commercial bank debt for, amongst other things, conduct liability management on the shareholder debt.

[Operator]

And that will conclude our Q&A session.

I'll hand the call back over to Matt.

[Matthew DeYoe, executive]

Thank you, Regina. And with that, we're going to close the call. I appreciate everybody's time this morning and tuning in, and we will see you on the conference circuit over the coming weeks and months.

[Ana Cabral Gardner, executive]

Thank you. Thank you for the trust. Thank you for speaking with us. I mean, what we want to close with is the best is yet to come. And you can see we've been joined by a very prominent neighbor. So it's not just me saying that Brazil is really one of the most fantastic jurisdictions for industrial lithium production in the world. And we're hoping that all of you, our shareholders, will continue to benefit from that tremendously over the next couple of years.

[Operator]

That will conclude today's call. You may now disconnect.