Earnings Transcript for JRV.AX - Q1 Fiscal Year 2023

Operator: Thank you for standing by. And welcome to the Jervois Global Q1 2023 Results Investor Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Bryce Crocker, CEO. Please go ahead.

Bryce Crocker: Thanks, Ashley, and a pleasure to be here today with James May, Chief Financial Officer. Clearly this has been an extremely challenging quarter for us at Jervois and all other shareholders. Price is outside the company's control, mainly a continued weakness in the cobalt price, which has now fallen into the $15 per pound range, a 40% decrease from the 25% at the start of November 2022. Today's cobalt price is also $25 per pound lower than a year ago when we were touching US$40 per pound. Price is within the company's control however. We disappointingly failed to manage a hyperinflationary construction environment in a remote location in the United States, as well as Australia, and also failed to structure legacy contractual arrangements into our finished, refining and advanced metal manufacturing business as aggressively as we ought to have prior to the 2022 downturn. Today's presentation will be in a different format so we can appropriately focus and address equity markets concerns. In particular James will spend time today discussing our balance sheet. Current focus of management is to ensure the Jervois has a viable, sustainable and finance pathway to ride out this trough in cobalt prices. To summarize, we ended the quarter with US$50 million in cash and US$66 million in physical cobalt inventory. Our debt today remains the same as a quarter end with US$100 million in the United States due in May 2026 with no amortization prior and US$70 million drawn under the US$150 million Mercuria facility. I will say, our circumstances both macro and operational, mean that our balance sheet is not as robust as we would like. Equally management believe the current share price does not reflect the company's situation. Certainly, Jervois equity values disconnected from debt markets where Jervois bonds have been well supported. I believe there's an underestimation of the key strength of relationships, Jervois established with major shareholders, lenders and commercial partners. The relationship with Mercuria, one of the largest commodity trading groups globally continues to be a key differentiator. We are pleased to have seen Mercuria recently buying shares on market to increase its shares slightly less than 10%. Idaho has been suspended and finally negotiation with contractors on appropriate responsibility for the cost escalation continues. Idaho Cobalt Operations or ICO is no longer a drain on cash resources as we complete the pivot to a cost effective suspension mode until prices recover. The mobilization at ICO has been completed, and most importantly, it's been done safely and in compliance with our environmental obligations. Our focus and the team's focus in Salmon is now turning to positioning to be prepared for a restart when cobalt prices do recover. Also the suspension at ICO due to the low cobalt price disappointing, we are confident on future pricing trajectories of the commodity. When it does recover, Jervois also working alongside the United States Government, with the Department of Defense and now we are actually taking initial steps towards meaningful support to secure the future of America's only cobalt mine. Sao Miguel Paulista or SMP has been slow and let me be clear that no intent to raise parent level liquidity to restart Sao Miguel Paulista. Debt and partnership funding options at the asset level continue to advance with Ardnaree open and initial proposals received. Sao Miguel Paulista remains an exciting and important growth opportunity to be implemented at the appropriate time. Companhia Brasileira de Aluminio or CBA, the Brazilian company, who sold to Sao Miguel Paulista has also supported a 12-month deferral to June 2024 the final acquisition plan, previously Jervois was to pay R$62.5 million or approximately US$12.5 million at current exchange rates this June. Turning to Jervois Finland, a slightly low cobalt price besides generating positive cash flow and is expected to return the positive EBITDA from this month. For Q2, at current global prices, cash flow is expected to grow significant. James will talk around our legacy inventory position, how this is now behind this, with the business now restructured, stabilized, meaning it is capable of supporting Jervois capital structure and operational footprint elsewhere. We've also implemented changes to strengthen the management depth that Jervois’ [inaudible] with the hire of the new CFO and also our top production director with a long history of the neighboring and sister facility at Sao Miguel Paulista, the Harjavalta nickel-cobalt refinery also in Finland. I will now pass to James who will touch on additional steps we are undertaking to strengthen our balance sheet and to ensure we can robustly absorb this period of low cobalt prices.

James May: Thanks, Bryce. We have been working hard to reset the Jervois cobalt business after a very difficult 2022. pleasingly, the business has certainly turned a corner in Q1 and generated positive operating cash flow before interest payments of US$1.3 million in the quarter with the outlook for Q2 improving as just outlined by, Bryce. This result is an outcome of steps taken to stabilize the business and the delivery of working capital improvements executed in the quarter. As indicated, continued cash generation is expected to accelerate comprised significantly from Jervois Finland in the coming quarters and we expect to use that cash to support the funding of our line of business needs in 2023. Cobalt prices were down from $18.80 at Q4 2022 to $16.30 in the March, declining prices across the last few quarters impacted the pace of repayment on the material loan and that resulted in utilization of $45 million in cash in Q1 to meet repayments reducing the material loan balance to US$70 million at 31 March. We are continuing our plans to pursue a disciplined approach to inventory reductions, physical commodity inventory reduced by approximately 350 tons in the period, equivalent to 20 days reduction and moving us closer toward our target range of 90 days to 110 days. Cost reductions have been implemented across all sites, and as Bryce noted, most significantly at ICO, with the rapid demobilization for projects being executed through April. As Bryce just noted, the inventory reduction program and water improvements in Finland are continuing. As part of our approach to ensure we have the financial resilience to navigate as part of the cobalt price cycle, and as Bryce indicated, we have support from CBA for deferral of our final acquisition payments on SMP from June 2023 to June 2024 and we have initiated the sale process for the Nico Young nickel-cobalt project to New South Wales Australia. As noted, the SMP restart project has been slow, while we've pursued debt and partnership funding options. This is an appropriate and prudent pathway to SMP. I should also reinforce at this point that we do not intend to raise parent level equity to fund the development of SMP. Overall, the actions we have taken within the business particularly the turnaround that is underway at Jervois Finland, the decisive action we took to suspend ICO in the face of historically low cobalt prices, as well as a supplementary actions we have taken to support the balance sheet are equipping us to navigate this part of the cycle. We will continue to have an unrelenting focus on maximizing cash flow from our business and managing downside risks as we look forward. Turning to the next slide. So in terms of the outlook for 2023, our sales volume guidance for Jervois Finland remains unchanged. While the current quarterly run rate and strong performance in the quarter imply trajectory at the high end of the range for 2023. We are prudently maintaining the current guidance range to take account of uncertainty and quarter-to-quarter fluctuations in sales that can occur based on historical trends. Our inventory reduction plans are in execution and we reinforce our prior guidance that we expect to achieve a reduction to the target range of inventory days between 90 days and 110 days by the fourth quarter in 2023. Final forecast project costs of ICO up to the point of suspension and including the demobilization that's occurred in early Q2 totals US$155 million. The estimated monthly cost last year some suspension mode are estimated at approximately $2 million a month, without achievement of that run rate in late Q2. Costs for that suspension period are focused on environmental compliance and maintaining asset health to preserve restock optionality. Detail restart scenarios and planning is underway to put ICO in the best possible position for restart once the market recovers in due course. At SMP, while the project has closed, the total forecast project costs remains the same at US$65 million. While the restart project will not be immune from inflationary pressures and execution risks, the engineering and procurement activities we have completed in the first quarter has continued to reaffirm that the estimate remains balanced at this point. The estimated monthly site cost for SMP sits at US$0.5 million and first production is forecast following 12 months after full reactivation of the restart project, which is now expected once we have a confirmed funding pathway for the project. On that Bryce, I'll turn back to you to summarize.

Bryce Crocker: Thanks, James. So, in summary, clearly a challenging market. But I'm confident in our ability to rise to the occasion and manage effectively to watch them and this turning the corner and we look forward to relegating these bizarre losses in recent reporting periods behind us the business forecast to be generating strong cash flow across 2023, even at these cobalt prices. We continue to take proactive and prudent steps to manage the balance sheet as outlined by James, whilst also ensuring that the future growth and commodity price upside that we've created within Jervois is retained when the market recovers, in which we're confident. I'll just close just with an observation on the cobalt market. Cobalt is not dead. Cobalt is not disappearing. The cobalt is cyclical. We're in a downturn. But downturns that don't last forever in commodity markets, especially those that are forecast to become structurally constrained and stretch. The last year as we've seen a perfect storm hit the cobalt market. However, EV demand growth for cobalt continues to meet or exceed expectations with double-digit compound growth forecasts in cobalt demand well beyond 2030. These forecasts are consistent with what our commercial team has seen by our inbound OEM automaker, automaker software order requests was requested tend to volumes rising sharply from the start of 2024. Actually I'll close here and I'll open it up to questions. Thank you.

Operator: Thank you. [Operator Instructions] Your first question comes from a Vivek Bharat with Toa Investment Management [ph]. Please go ahead.

Unidentified Analyst: Hey. Hi, guys. First question is on the timeline of the ICO construction announcements. We saw that there was an announcement on March 16th, saying that you're nearing the completion of construction of the ICO. And then you are kind of reverse that and suspended construction on March 29th. So what we are struggling to understand is what exactly changed in two weeks and if you got back close to complete the construction of the ICO line, why didn't you just go ahead and finish it, albeit it might have taken whatever X million dollars to actually go to that final step. But we are a bondholder with security with ICO mine, we are a bit kind of flummoxed as to why the decision was made to stop the completion of the project when it was presumably weeks out from getting completed?

Bryce Crocker: I think thanks for the question. I will take it. So the decision that we were having really from January onwards once this cobalt prices fell was, A, do we finish construction, and B, if A is yes, how long do we finish before and our view is that, exactly with equity investors do we commission for three days, three weeks or three months, given where cobalt price is where the site will not make money. In terms of the press releases, this press releases for purposes with different audiences. And if you look at that mid-March press release, you'll see that we're quite clear in some of the closing statements about what would happen to the mine in the absence of government support specifically from the United States. The mine we made a decision that given where cobalt prices were, the right decision was to close the facility and I'm encouraged by the response with the U.S. Government, given the DoD announcement on funding the US$15 million given axioms notification of their intent to support. So whilst it's unfortunate that the mine had to close, we're all disappointed by that. Equally I do believe it's the right decision for Jervois and it's also, ultimately, I believe the right decision for Americans, as I've said to our stakeholders in DC.

Unidentified Analyst: Okay. So to that extent, whenever and I think I heard you guys say you'll have these demobilization estimates kind of ready over the next few weeks hopefully, we would like to get an independent engineer kind of going over those demobilization scenarios to see how much more it'll cost to finish the mine and then demobilize the workforce to start operating and whenever you guys see the pricing environment improved?

Bryce Crocker: I mean, the team is working, clearly the focus from now or from the announcement up until now has been a safe demobilization. The team now is turning particularly with the support from the U.S. Government and the upcoming drill program with regard to the future, albeit the future does require a higher cobalt price. The -- in terms of the where the site was, obviously, we were commissioned the mill. We're weeks away from putting all through the concentrator. And so now clearly there'll be inefficiencies with the demobilization and remobilization, but we believe it was the right decision to preserve the asset. And as we work through that way, at least, work we'll be updating market at the appropriate time once we have the appropriate level of rigor. And obviously, it's going to be predicated on the inflationary and construction environment in the United States at the time, and clearly, we hope when remobilize the operating environment will be different to what we've recently experienced.

Unidentified Analyst: Okay. In the interim, assuming cobalt prices do not recover. What exactly does the EXIM kind of support mean? Are you guys talking about a full refund of the bond, assuming the ICO actually doesn't restart or is that only contingent upon a successful ICO mine commissioning and restart?

Bryce Crocker: Listen, it is very premature and inappropriate me to speculate on what the United States Government may or may not do. All I will say is the engagement is extremely positive. I'm travelling to DC on Monday. I'm sitting on a panel led by commerce and other CEOs and the United States is looking at their critical mineral supply chains very seriously, and obviously, we are the only cable online in the country. But it's presumptive of me to speculate on how the government will approach actually when to start.

Unidentified Analyst: Okay. And finally, again, just given the pricing environment, what do you guys think is the consolidated kind of free cash flow at this $15 kind of price level for the company over the next 12 months?

James May: In terms of ICO, which is where your bond resides, we've been quite clear that, I mean, simplistically, I've said to equity investors, the price mix to start with a two for Idaho to be generating adequate returns. Now the reality is the bankable feasibility study was published with a price of $25. And given cost escalation in the United States, I'd equally argue we'd want to price above that, for that facility to be generating adequate returns given us a finite work resource and a strategic resource. In terms of our impact across the Group. I mean, I use the example in 2020, Jervois Finland made $20 million EBITDA based on a $15 cobalt price when cobalt pay abilities were much higher than they are today. Our business can be sustainable at current cobalt prices and we've taken aggressive steps and continue to make steps to ensure that the operational sites and capital structure can be adequately sustained.

Unidentified Analyst: So assuming, I think you mentioned that, the ICO will have a $1 million per month kind of costs, as long as it's been shut down by Q2. And assuming Finland gets back to that $20 million EBITDA run rate. There's obviously kind of $11 million of interest costs associated with the bond, we'll have interest costs associated with Mercuria. What are the CapEx items over the next 12 months, assuming the SMP the remaining kind of payable is being pushed out to June 2024. So what is the consolidated free cash flow post all these CapEx, as well as interest costs and anticipated EBITDA from Finland?

James May: I think in terms of Finland, you need to look at cash flow, not EBITDA, because cash flow will be orders of magnitude higher than EBITDA as the inventory position and these lower prices flow through, and obviously, there's a significantly delayed effect to lower prices in terms of how that flows through and in terms of capital. there's essentially none. We will now pass to Operator to other questions I think we've given this individual. Thanks for your questions. You can feel -- please feel free to reach out if you have other questions to James May directly, our CFO, let’s just see if there are other questions on the line, if you don't mind. Thank you.

Operator: Thank you. [Operator Instructions] Thank you. Your next question comes from Ross Cameron [ph], a Private Investor. Please go ahead.

Unidentified Analyst: Yeah. Thank you. Look, again, I guess, look, I noticed the announcement around the that dispute between China's CMOC and the DRC over royalties, and that sort of freeing up after 10 months of band that seems to have been resolved. So it seems to me that there's going to be a lot more cobalt in the market. Can you talk to that and what the industry is saying about that and potentially the impact of that on the price?

Bryce Crocker: Sure. I mean, I think that that the materials that are sitting in the DRC, I mean, obviously, they've well known, they're well understood, there's been an expectation China, Mali has been publicly communicating their expectations of the settlement and so we don't necessarily see great change, those units will take time then the DRC to flow out. And we're not seeing great significantly negative sentiment flying through certainly in the physical market versus what was expected previously.

Unidentified Analyst: Okay.

Bryce Crocker: Okay. Operator, are there any other questions?

Operator: There are no further questions at this time. So I'll now hand back to Mr. Crocker for any closing remarks.

Bryce Crocker: Great. Well, thank you for your time. I hope I conveyed our optimism for 2023 and if there are questions, please don't hesitate to reach out to the team here in Mountain [ph]. Thank you.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.