Earnings Transcript for FEAM - Q4 Fiscal Year 2023

Operator: Greetings and welcome to the 5E Advanced Materials Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Davis Snyder, investor Relations. Thank you, Davis. You may begin.

Davis Snyder: Good afternoon. Thank you for joining us today for the 5E Advanced Materials fiscal fourth quarter and year-end 2023 earnings conference call. During this call, management will be referencing our earnings press release and a webcast presentation that can be found in the Investor Relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Alpha IR Group at FEAM@alpha-ir.com. Please turn to slide 2 of the presentation where we presented our legal disclaimers. I want to remind everyone that remarks made on today's conference call will contain forward-looking statements including our expectation of future results, costs, production, capacity, market dynamics, liquidity, cash spending, and other items. Our actual results may differ materially and adversely from those projected or discussed in these forward-looking statements. Additional information concerning factors that could cause the results to differ materially and adversely from these forward-looking statements are contained in our press release that went out earlier today as well as the disclosures in our public filings with the SEC. The Company is under no obligation to update these forward-looking statements. Today's call may also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. This afternoon's conference call is hosted by 5E's Chief Executive Officer, Susan Brennan; Chief Financial Officer, Paul Weibel; Chief Marketing Officer, J.T Starzecki; and VP of Operations, Chris Knight. Management will first lead off the call by making some prepared comments, after which we'll open up the call to your questions. Now, please turn to slide 3 of the PowerPoint, and I'll turn the call over to Susan Brennan. Susan?

Susan Brennan: Thank you, Davis, and thank you everyone for joining us today. We recently closed the books on our 2023 fiscal year. We made significant progress against our goals last year and remain intently focused on advancing the corporate and commercial operations of our 5E Boron Americas project. As we look to fiscal year 2024, we felt it was important to create a regular cadence of communication for our investors around the globe. And thus, this is our inaugural quarterly earnings call. Today, we are going to discuss where we are along our project development timeline, we'll update you on our guidepost, and reintroduce the long-term opportunity for those of you that are new to 5E and/or considering an investment in the Company. First, while I have had the opportunity to speak to some of you, there are many I haven't met. I took over as CEO in late April of this year. I've spent the majority of my 30-year career working within leadership positions of global organizations in the materials, clean tech and automotive industries. This includes most recent CEO positions in battery and EV technology at Romeo Power, which we sold to Nikola Motors last year. And previously, I was the COO of Bloom Energy for eight years, a leader in fuel cell technology. Prior to that, I held multiple operational roles at Ford and Nissan, and was a research assistant doing chemical process development at Hoechst Celanese, early in my career. As you can see, I understand our end markets. I am proficient at running an early stage company, and I know how to build a global organization. Over my first few months, I've had the opportunity to meet with key personnel, our skilled operators and staff, and align our team together under common goals. I can say with confidence that we are on a well-planned path to success, and we are doing the work to position our company to create meaningful value for our shareholders and stakeholders, both over the next year and into the future. A common question I have received in the first months of my tenure has been, what brought me here to lead the Company? 5E is an inherently unique project, representing a pure play opportunity in boric acid as well as lithium carbonate in an environmentally responsible way. Aggregate demand for boric acid carries meaningful tailwinds over both the near and long-term, given that it sits at the nexus a number of developing industries that will play a meaningful role in the global energy transition. Many of you have been following us for some time now. And I’d like to update you on our immediate focus areas. As you know, our plans have been temporarily delayed by two near-term issues

Paul Weibel: Thank you, Susan. I'm going to spend a few moments talking about where our 5E Boron Americas project at Fort Cady stands today and the progress we have made bringing the vision to reality. Then, I will spend some time speaking to the expected capital scope of the project across its modular multi-phased approach. And finally, I'll provide details of the capital solution strategy we are deploying in order to bring in the capital needed to adequately fund our project to scale and grow our production. Please turn to slide 6. As Susan highlighted, the construction of our Small Scale Boron Facility at the 5E Boron Americas Complex has been able to overcome the short-term construction challenges left by the previous contractor, and we've put the facility in a position to be ready at the time we receive the EPA’s authorization to inject. We recently brought on a new construction contractor to conduct last mile construction activities and remediate any identified deficiencies in workmanship. We are incredibly proud of our local team as we took on a number of smaller tasks ourselves to save additional costs. The important takeaway here is that even with adversity, we are on a path to complete the necessary construction work that will allow us to turn on the plant upon receiving the necessary clearance from the EPA. Our current budget forecast an incremental $5 million to be spent on the small scale facility with final mechanical completion slated for mid-October. The small scale facility can be broken out into five sections

J.T Starzecki: Thank you, Paul. Please turn to slide 9. Over the next few minutes, I'd like to talk about our cohesive strategy that encompasses commercial customers, the Loans Programs Office of the U.S. government, the Department of Defense's, DPA Title III initiative, and our capital markets program to drive us towards a successful outcome of funding the commercial construction of the 5E Boron Americas Complex. The first part of our strategy looks at how we are approaching our commercial opportunity and market development. As we bring our Small Scale Boron Facility online, we will be in a position to engage in a deeper level of conversations with potential offtake customers. Product validation is the key component to any commercial relationship we build, and having boric acid directly from our orebody developed to a tight set of technical specifications sets us on an equal playing field with our competitors. It also allows us to begin offtake contract discussions from a position of strength rather than just a theoretical position of future product. It brings us to the here and now as the newest domestic producer of boric acid. As Susan mentioned earlier, we have a number of commercial LOIs in place, which have set a foundation and continue to have conversations with multiple potential partners focused on advancing our long-term material strategy. Our government affairs strategy supported by our partners in Washington DC is focused on developing and expanding opportunities for 5E to partner with agencies on key defense and clean energy funding programs, namely the Departments of Defense, Interior and Energy. Through recent engagements with agency leadership, including 5E site visit for over a dozen senior DOD and DOE staff, we have identified priority areas for advocacy and for partnership with the federal government. Given that the Department of Defense categorizes boron as a strategic and critical material to the defense industrial base, we believe there is significant potential to partner with the DOD on securing a new domestic boron supply chain. While we are always beholden to timelines and due diligence processes, we do feel excited about the possibilities that exist with the Department of Defense in the near term to reduce our defense industrial basis dependence on foreign suppliers. That brings us to the Department of Energy and its Loans Program Office or LPO. The LPO essentially has three phases

Susan Brennan: Thank you for taking the time to listen to the earnings call. Slide 12 repeats a project milestone chart we shared with you when we released our technical report that includes both the SSBF and the engineering design for Phase 1 commercial plant. I’d like to break that down a little farther into review of Phase 1 commercial plant details on slide 13. This includes producing boric acid and lithium carbonate, progressing commercial negotiations once boric acid and lithium carbonate are in production and product is qualified, progressing the first phase of commercial engineering design and bolstering our technical team, enabling the next phase of commercial funding. Let's close our prepared remarks with a quick review of our core investment appeals on slide 14. First, we possess a unique and rare resource, providing exposure to the critical minerals, boron and lithium. These materials will play an important role in the U.S. reshoring, de-carbonization, and the domestic production required for the clean energy economy. The 5E Boron Americas project already bodes a fully constructed plant over a historically operated mineral deposit, and has been designated as critical infrastructure by the U.S. government. The initial facility is built for near-term and long-term production capabilities. Further, our multi-stage execution model provides us with valuable optionality throughout the project lifecycle, allowing us to optimize our decision-making as we advance along our timeline. And finally, 5E is poised to be a significant global business with annual expected EBITDA of $682 million, once full production capacity is reached. As always, I'd like to thank the entire team at 5E Advanced Materials for their hard work and contributions as we seek to build long-term value for our shareholders. With that, we will open up the call to your questions. Operator?

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson.

Matt Summerville: Couple of questions. First, can you maybe just remind us what pricing assumptions you're using that would be inherent in the EBITDA projections you set forth by stage? And then, can you talk about when the market is expected to enter a firm and somewhat permanent, for at least the time being, deficit position with respect to boric acid? And then, I have a follow-up. Thank you.

Susan Brennan: Thank you, Matt. I will -- Paul, you want to take that question? And J.T, you can talk about the market.

Paul Weibel: Yes. Thanks. So, first full year production pricing is about 1,700 per ton. And we see it ramping up from there, driven by that supply deficit. And then J.T, do you want to get into the deficit?

J.T Starzecki: Yes. Thanks for contributing, Matt. Really appreciate it. So from a market deficit perspective, really we saw in third quarter and fourth quarter of last year, all the supply that was being provided into the market was spoken for, we saw that same trend in quarter one and quarter two. So as we're bringing on more and more technologies, we're at that tipping point today. So, it's only going to take a small uptick in demand to have production or capacity being outpaced by the demand. So, we're pretty much at that precipice right now.

Matt Summerville: And then just as a follow-up, can you maybe talk about what informs your decision whether to sell SSBF output to potential customers versus utilize that output to start to pursue your advanced material strategy?

J.T Starzecki: Yes, absolutely Matt. So let's talk about just the output in general. So, as we've publicly stated, we've talked about the 2,000 tons that the SSBF will be producing initially. We have also publicly talked about increasing that production to be a bit more at scale. And that's going to allow us a couple of different opportunities is number one, the initial product coming out of the plant will go for product qualification to firm up all of our discussions around offtake tonnage and pricing. So that's the initial product that'll go out. As Chris and his team start to scale up production and we increase run rate, we'll be able to then take that product and sell it into the spot market and then potentially even early service some of the offtake customers. So, that's our intention is to take the product, get through qualification with our identified customer base, and then move the other product into the market as a sellable product.

Matt Summerville: Just as a quick follow-up to that. You look at kind of the timeline, if you will. How long does it take from the time you're getting good stuff out of the tail end of the operation to get product qualified? How long does it take to drive production of the SSBF higher such that you're beginning to sell into the spot market?

Susan Brennan: Yes. Matt, I'll have Chris take that.

Chris Knight: Yes. Thanks Matt. So, we're anticipating probably needing about 60 days to get the plant up and running. We know that we've got some particular challenges as all startups have. We'll face those. We'll need to get those addressed. We have already engaged several critical customers of ours. Those that we have LOIs with, and we've talked to them, they're expecting their time horizon for qualification to be anywhere between three to six months. And that's for full commercial qualification. At that point, then we'll be able to start placing product into the market and really working out those supply chains.

Operator: Thank you. Our next question comes from Ben Kallo with Baird.

Ben Kallo: Maybe first, it sounds like there's demand and one of the things is from -- Turkey being the biggest producer, just how have you seen any kind of changes in your discussions with customers change? Just, I imagine people understand the deficit that's coming as you kind of walk that through. But just how has that changed customers’ discussion this with you?

Susan Brennan: J.T, do you want to take that and also talk maybe about the government implications, too?

J.T Starzecki: Yes, definitely. Good to talk to you, Ben. Thanks again for joining. From a customer sort of evolution perspective, what we are seeing is very clear signs of customers that we are in discussions with wanting to diversify their supply base. So, there are some, what we’ll call, product quality issues just from a transportation taking perspective, depending on where the product comes from around the globe. But one of the clear signs that anybody that we have engaged in conversations with, and it is very ongoing dialogue is, their need to diversify, to not be tied into one supplier or even two suppliers, just given the inherent risk of both product availability and from a pricing perspective. So, I would say, that's the single most definitive characteristic that we’ve seen in these commercial discussions, so far this year.

Ben Kallo: And Susan -- thank you. When I look at the cash position -- management, like the multipronged figure, be that -- Romeo, you saw, all the people doing deposits for sales, while they are very short. Is there a way to, like, structure or something like that with a partner where they help with the capital?

Susan Brennan: Yes. No, Ben, that's an excellent point. As we have talked about the deficit, I guess, the clear answer is, yes. And the opportunity to sell ahead similar to the sell dynamic is definitely something that we are exploring.

Ben Kallo: Okay. And then just finally, you say you had -- said you had all the necessary permits. But then I think you, Susan, you said that, you did some kind of EPA sign off for the injection wells. So, could you just clarify that for me? And thank you guys very much.

Susan Brennan: Yes. And thank you for asking that question, because we get it often, and I want to make sure we are really clear. There is a permit in place. That permit has conditions. And because this is an orebody that has been -- as we said had experimental work done in the past, we are -- those condition includes work we have done as well as closing out work from the past. So, we need to meet the conditions need from the EPA. And once we’ve given them the data and the assurances, then we’ll be able to look forward. So it's not the permit we are working on, it's really releasing the conditions on that permit.

Operator: Thank you. Our next question comes from Matthew Key with B. Riley.

Matthew Key: Hi. Thank you for taking my questions. I was wondering if you could maybe just go into some greater detail on the potential timing of the government financing route. And assuming everything is successful there, could you maybe just share on some -- how much you could potentially receive from the DPA Title III program, especially?

Susan Brennan: Yes. J.T, do you want to take that one?

J.T Starzecki: Sure. Good to talk to you, Matt. Thanks for joining the call. So, I think, it's probably best if I sort of break it down into two buckets. And as you rightfully hit on, there are really -- there is the DPA Title III Act, which sits under the Department of Defense. So, let me start with that. Really, the key mechanism there is an attachment to various components that go into either military, technology or supply chains that go into the production of that technology. The application for funding initiatives is a little bit more straightforward with the DOD. You essentially develop a white paper and you go through a series of discussions with the Department of Defense directly. And then, as you've made your case, you put in your request for funds, and that gets written into an appropriations bill. So that appropriations bill is being negotiated now for next year and is done on an annual basis. So, we see the DPA Title III and the DOD as what we would call more of a near-term path to funding. Then, when you get into the Department of Energy under the Loan Program Office, there's a multi-step approach that I mentioned in my opening remarks that has kind of three phases. And as you move through the phases, you've got different levels of due diligence that you go through, right, talking about the project itself, the detailed engineering, the construction schedule. And so, that project or that program takes a little bit more time. You'll see in published reports from the DOE, the average time is about 12 months to get something done. And in all likelihood, that might extend a little bit longer. That being said, the pool of capital available under that program is significant. So, when we look at how we're going to break down the capital structure, I would say that the Department of Defense is quicker to funding, but the large portion of the funding will most likely come under the Loans Programs Office.

Matthew Key: Got it. That’s really helpful color, J.T. I appreciate that. And I guess just one more for me. You mentioned during your prepared remarks that you've taken some steps to kind of reduce overhead costs. What's a good assumption we should be thinking of kind of for cash burn per quarter as you look at fiscal year '24, obviously not including the $37 million in CapEx spend, and that's obviously estimated?

Susan Brennan: Yes. Let me start and then, Paul, if you want to tag in at the end. So I just want to reframe, when I came in back in May, we narrowed the scope of the Company and we are still an advanced material company. But I call it the order of operations, we narrowed down to spending today only on things that will get boric acid out of the ground. And as we move forward, once we start getting boric acid, we actually will have to go up in some of our spend because then we need to buy some of the materials that we are not buying today. So, this is a grade in, it was kind of a -- if you look at the graph we went from a level to a lower level, we're going to hold it that lower level. And then as we have aligned the work that Chris and his team are doing in operations to what we believe the EPA timing is, so that everything comes together at once and then we start and then we ramp up. So, Paul, you want to give any more context to that?

Paul Weibel: I appreciate the question. And just reiterating what Susan said, once she came in, leadership got together and really just identified, okay, what are must haves and what can go, and meaningfully have reduced our administrative burn down over the last two months. And we'll keep that pace moving forward. I think internally our goal is just from like a pure G&A is about 1.5 a month, and -- but then as we get clarity on permit, we can toggle and have that ability to go up and down.

Operator: Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question.

Tate Sullivan: I think you mentioned an incremental $5 million of CapEx on SSBF. Can you talk about what that spending will go to, a little detail on that?

Susan Brennan: Yes. Let me -- we'll turn that over to you, Chris. Thank you Tate for the question.

Chris Knight: Sure. Yes. Thanks, Tate. So what we've got, Tate, we have right now -- we talked about the five different areas. We are mechanically complete and commissioned in PLS and in our utility areas. We are wrapping up on the wellfield. We just -- basically we disassembled that in preparation for the step rate testing and then we'll reassemble. So, some small dollars really there. The majority of the cost is going into just finalizing the piping and the electrical work needed in the boric acid and the gypsum areas and some ongoing spend, cranes, welding machines, some leased equipment that we're using to finalize that construction.

Tate Sullivan: And then also related to that, is there any ongoing -- I mean, should we take into consideration ongoing dispute with Matrix in terms of an outstanding payable or anything as such?

Susan Brennan: Yes. And I -- yes, we're not going to answer any questions. This is active litigation. So, we're not at liberty to answer any questions at this time, on that topic.

Tate Sullivan: Understood. And then on the SSBF production, and J.T, you addressed it earlier, the 9,000 targeted short tons of boric acid production. Is there a rough portion of that already spoken to in terms of quality testing and for a potential offtake?

J.T Starzecki: Yes. So, we have -- some amount will go for qualifications. And several of our potential customers, they have multiple sites. Each site is going to require commercial quantities, full shipments of material to run through their plant. But that's not going to be a significant amount really from an overall testing perspective. So, once we get those -- that material tested and we continue on that production, once that gets cleared, we should have volume then available for sales.

Operator: Thank you. There are no further questions at this time. I'd like to turn the floor back over to Susan for closing comments.

Susan Brennan: Thank you everyone for your time and interest in 5E Advanced Materials, Inc. We have a tremendous opportunity in front of us to become the newest boric acid and lithium producers in the world. We have the culture, execution, and leadership with our go-forward team on the ground and executing daily. We have a proven asset and a strategy to modularly expand the assets over the next several years. We're looking forward to sharing this journey with all of you.

Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.