Finally managed to catch the Q4 investor call via replay.
Am in between meetings and wasn’t planning to share my thoughts until midweek, however, I have been inundated with pessimistic messages all day, so I thought I would whip something up.
I find it interesting how people perceive things differently. Not saying anyone is wrong or that I am right, but personally my confidence in the business and management’s strategy has improved after listening to this investor call. And I just texted Bryce earlier to let him know that.
Allow to me to elaborate.
As some of you would know, I heavily criticised Bryce after the past two quarterlies. I actually contacted Bryce from my hotel room on Ishigaki Island (while on a family holiday) after the June quarterly and didn’t hold back. I felt as if they didn’t fully own their mistakes and I also had plenty of unresolved questions around their decision making. In this quarterly, I appreciated the improved candor. I feel as if I better understand the mechanics of the business and as such - my confidence has improved.
To wit, Bryces’ discussion around ‘enhancing the business model’. He made the point how historical supply agreements (at Kokkola) had provided volume protection in a rising market, but less flexibility in a downturn. They were forced to accept product they didn’t need and at prices above market. These were legacy contractual arrangements. They have learnt from this and will now seek new contractual terms that improve flexibility - supply into Kokkola that reflect changing market conditions. They will also carry this philosophy into the SMP and not lock-in any supply agreements at this point. We all know they effed up by stockpiling massive amounts of inventory when prices were sky-high, but we didn’t know why they had done this. This additional discussion was over and above that of previous quarterlies. “Financials were affected by purchases of feedstock in a higher priced environment. We weren’t prepared for a cyclical downturn in the cobalt market” (owned it - they effed up). “Not the right time, price and demand cycle to reduce inventories”. Bryce also mentioned having access to the CME tool to manage risk (something that wasn’t available last year).
A recurrent theme I have picked up on in multiple presentations of late is that of the growing EV demand for cobalt. Keep in mind that (until now) industrial demand has made up the bulk of cobalt demand. But, that is changing - with EV demand expected to drive future growth. Did you hear his comment re: delivering cobalt into a European gigafactory? And how “OEM enquiries for 2024 onwards are now in large numbers” and more than they can provide today. Anyone else getting the sense that they are trying to hold on to as much inventory as they can today for when the OEMs come knocking in 2024? “With the rise of battery demand and the contractual nature of its purchasing, we’ll be able to switch a higher proportion of sales to contract over time”. “We remain extremely positive re: outlook for the Co market”.
Benchmark put out a slide a few days ago that showed how much raw material Telsa’s 140 GWH battery gigafactory would consume. This one factory would consume 11,000 - 15,000t of cobalt. There are 13 gigafactories in the Benchmark pipeline over 100GWh. You do the math. EV demand for cobalt will eclipse industrial demand in future years. But, it doesn’t happen overnight. Patience is needed here. Remember, folks, that production at the ICO is < 3,000t per year. Not going to have much trouble finding a buyer/s.
In the Q&A, Tim from Canaccord asked how many parties they were talking to re: ICO off-take agreements and timelines around those off-takes. Bryce responded that there were “half a dozen” - but that they were trying to balance the ST vs LT (hint here again). They weren’t rushing today and were bullish on the cobalt market. “We are positioning the business to manage the inventory to ensure that we are not giving up too much at what we perceive to be close to the bottom”.
Re: Financials. There is no polishing a turd. It was a poor quarterly - not helped by the cobalt price falling from $23 to $17. Q4 revenue was 14% lower than in Q3. James touched on the adjusted EBITDA and factors impacting that. Inventories reduced by 5% vs Q3. And James made the comment that they would unwind inventory in a disciplined manner (aiming for 110 days by the end of 2023). As mentioned above, they clearly want to be holding a decent amount of inventory at year end (you can guess why - when you cross-reference this with their comments re: OEM discussions). They are planning to use cash from reduced working cap to pay back the Mercuria facility (prudent). And Bryce mentioned that Mercuria “remained supportive” of their strategy. I think this point is under-appreciated by many punters. It is a unique set up that allows them commercial flexibility not afforded to many of their peers. There was a NRV comment and it being a rare accounting adjustment which has historically occurred during periods of extreme price volatility - such as 2022.
Mondy, I respectfully disagree with your comment re: them harping on about their strong balance sheet. A$370m in cash & cobalt inventory at year-end is a decent position - even if we account for the fully drawn bond and Mercuria facility. The debt is manageable (Mercuria facility secured against the cobalt inventory). They are well-capitalised to navigate their way through a challenging period of soft cobalt prices and rising ICO capex. Importantly, they have access to capital on both the debt and equity side if need be. I was annoyed with the recent equity raise, but once I crunched a few numbers, I put it into perspective as being critical. We have a “balanced funding strategy that supports our growth objectives and provides flexibility to navigate market volatility”. This was better from you, James. The balance sheet is strong - given where the company is in its genesis as an operating company (16 months). Investor complaints about them carrying debt or raising equity make little sense to me. How does one think you develop assets? You need capital to bring assets online. Harsh judging a business in its infancy/initial growth stage. One needs to allow some leeway re: time, etc. The equity raise was always about more than just the SMP refinery restart. I wouldn’t analyse Jervois the same way as I would a company with all their assets up and running. I will be far more critical when the ICO is at nameplate production and the SMP has been brought online than I am now.
Re: Cobalt market. Price upside once China gets back to biz. China flooded export markets when domestic demand was weakened due to their lockdowns. Adam at Macquarie asked about the Co market. Bryce replied that forward cobalt prices on the CME have showed an uptick. And it is largely OEM buying - which is a positive. Optimistic over 2023. China can’t reopen and the price not move. Remember - nothing exists in perpetuity.
Re: ICO. Positive: expansion activities via the drill bit. Geological upside is significant. As previously mentioned, LOM expansion will enable them to spread out balance sheet intangibles - something MiningNut refuses to do with his alarmist calcs. Importantly, a LOM expansion will open up opportunities re: refinery. USG conversations are continuing. And they are ready to step up with the right partnership model re: domestic cobalt refinery. We can’t assume this is a fait accompli. There has to be a commercial logic. And it is a test of the USG’s credentials re: both ESG and the security of critical minerals supply narrative. And don’t forget the potential of subbing out the bond for cheaper USG funding that still exists in the background (hopefully). Many of us have been waiting for some time to hear something on this front. Fingers crossed the USG step up at some point and actually provide some material support.
Negative: capex to increase 15-25% over the $107m budget due to surface construction issues related to labour issues and weather. I wondered why workers were commuting 2 hours to site rather than utilising the accommodation facilities there (as Mick Rodriguez told me back in 2019 that workers needed to stay on site during the winter due to the harsh conditions). The camp has 100 beds, however, they averaged 150 surface construction workers on site per day in winter. The road is slower to traverse due to the conditions. And he made some comment about half the workers not showing up post-Christmas (retention issues). Productivity is now back to November levels and workers have been rocking up. Cap blowouts aren't fun - but much better when the overall capex is low vs projects requiring hundreds of millions/billions.
SMP: progressing well. Bryce mentioned structural rather than cyclical changes in the nickel market. And reminded us of the numbers. Ni at $13 now (+ $1.50 premium) vs $8 in the FS. On the input side, prices were 60% of the LME vs 75% used in the FS (so expanded margins).
All-in-all, it was a horrible quarterly in terms of the numbers (but to be expected), however, I reiterate that my confidence has grown rather than diminished after listening to this investor call and putting everything into perspective.
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