ERAMET S.A. (OTCPK:ERMAF) Q2 2023 Earnings Conference Call July 27, 2023 4:30 AM ET
Company Participants
Christel Bories – Chair & CEO
Nicolas Carre – CFO
Conference Call Participants
Nicolas Montel – Portzamparc
Julien Onillon – Stifel
Maxime Kogge – ODDO BHF
Christel Bories
Good morning, everyone. And thank you for being with us for this Half Year Results Presentation. I know it’s busy period with a lot of results released from many companies the same day. So thank you for being with us.
Clearly, after a very good performance and record financial results in 2022, we have experienced a much more challenging first semester in 2023. And the first reason for this difficult semester, and by far, the main one has been the deteriorated market environment, with very sharp reduction in our commodity prices. And as you can see, on this slide, we have experienced significant drop mainly in our manganese alloys businesses with almost minus 50% on our price, minus 23%, on the manganese ore price index, and more than 30% for the ferronickel just to name the main ones.
Overall, the price impact for the semester has been higher than €720 million, which is huge. And if we take into account the high level of inflation that we have experienced in our activities, and still high cost of some key inputs, like the reductant. The overall external impact on our account has been as high as €750 million, and represent about 90% of the drop off our EBITDA.
The second reason for this difficult start of the year has been the significant logistical incident that we have experienced in our manganese activity in Gabon. It started with a big landslide end of 2022, the end of December resulting from major seizure [ph] of more than 7.5 on the Richter scale. And it considerably damaged the track and stop the transport for more than one month. And it was followed by a rupture of civil structure bridge, at the beginning of April, which again stopped the transport for several weeks.
So, this not only impacted our ore deliveries, but it also reduced our production since the mine to be stopped during several weeks due to the lack of fuel and parts necessary to the mining activity. And so, the volume of manganese ore produced assets down 27% to €2.6 million in the first semester of this year, which is obviously significant impact.
Those incidents are now behind us and when we look at the June and July result, they are back to the best historical levels in terms of both production and transport.
Manganese alloy has also gone through the challenging semester with some planned realigning. We had two relining plan this year and adjustment of our production due to the poor market condition and poor market demand, especially in Europe and in U.S. And fortunately, are Weda Bay mine continue to perform very well and continue this expansion with the growth of volume of 80% to more than €16 million during the semester. So overall, mixed performance in H1 leading to disappointing results that you can see on this slide. So indeed, our adjusted EBITDA is significantly down to €339 million.
Our free cash flow generation has been negative at minus €120 million, and due to this negative free cash flow and the payment of the dividend in H1, our net debt has increased to €712 million with an adjusted leverage of 0.7.
Of course, in front of this challenging environment, we have reacted rapidly. And we have implemented action plans to reduce our costs and save cash. And Nicolas, our CFO will explain that later. We also reviewing our production plans for the second semester to make sure that we optimize our production with iron ore grade and mix in addition to improve volumes.
In this challenging environment, we have continued to implement steadily our demanding CSR roadmap with further key achievement that you can see on this slide. We are proud to communicate our safety results. Safety is a key value at Eramet and number one priority. We continue to progress our effort to as reached a level of one during the semester and position us among the top three performer of the ICMM ranking ICMM rank all the mining and metal industry in the world, and we are the level of the top three performers. So I think we should be proud of that.
We have also created the Eramet Global Firm. We are the first mining company in the world to set up a transnational social dialogue body to be able to negotiate and also sign agreement at world level on things like quality of life, social protection, and other things at different — at the level of all our countries.
We have also launched the first independent assessment of our mines, according to the Eramet standards, you know that Eramet is the highest CSR standouts in the mining industry for responsible mining. We are one of the first mining company committed to have all its sites certified by Eramet and the first independent assessment has been launched in Senegal.
And we continue to contribute heavily to the region — the regions in which we operate. And you see the economic contribution that we have in those regions and above, almost 130,000 people are benefiting from the group’s social programs in those countries. So many key milestones in this journey. These are just examples, but we continue to lead the pack in terms of CSR.
Also in this — despite this challenging environment, we are staying the course and focusing on our strategic roadmap. Our first and main priority is development of our great lithium deposits in Argentina. The construction of the Phase 1 of the project is going well and should start production as planned in Q2 next year. Thanks to the good market dynamic and the first quartile cost positioning of these assets.
We are also accelerating the Phase 2 as we announced earlier this year. We should be able to make the final investment decision of a first tranche of 30,000 tons of this phase two during the second semester of this year. And we have also secured additional financing for these projects with the Netherlands on sale of lithium carbonate of $400 million Glencore as announced this morning.
Regarding our nickel cobalt HPAL project in Indonesia, we are still working on the best execution model and financing strategy. We will only make our decision when these topics are satisfactory, finalized and which could take a bit longer and that’s why we may postpone the FID to 2024.
Regarding our battery recycling project, we have finalized the pre-feasibility study, and we are now successfully moving to the next step feasibility studies. The pilot plant is being finalized and should start in September. And also, and it’s important we continue to build a portfolio of opportunities in our key strategic markets through exploration and business developments in two main areas, Lithium brines mainly in Chile, and nickel limonite in Indonesia. In Indonesia, we have recently formed a consortium together with the local provider of green energy and two Western OEMs in order to apply for new exploration licenses.
And finally, as you already know, the group has finalized during the semester of the divestment of its non-core activities with the closing of both the Aubert & Duval and the Erasteel divestment.
So now I will hand over to Nicolas, for the financial performance and the operational performance. Thanks, Nicolas.
Nicolas Carre
Thank you, Christel. Good morning, everyone. So indeed, I will now provide a bit more details about our financial performance as well as operating performance in the first half. Starting with some key numbers, I want to detail them, because most of them have already been mentioned by Christel. A couple of them, I would like to highlight. The first one is a positive net income group share at €98 million. And I will come back in more details later on. And the other one is the level of leverage, adjusted leverage, which is at 0.7, at the end of June. And also with the gearing, which is at 33%. You may remember that we are much, much, much higher level in, I would say a couple of years ago, and even a year and a half ago. So that’s also something I will highlight a bit later on.
So how did we get to this picture of adjusted EBITDA in the first half? So divided by 3.5. As Christel was saying, at the very beginning, the main driver by far is a price impact, leading to a negative external factors of €749 million. This means that 90% of the reduction of the performance was coming from this — significantly reducing selling prices, comparing, of course to record level where they were at the beginning of last year.
So this is by far the big driver. And just to complete on these external factors and Christel has also mentioned it at the beginning €43 million is also adding to that in terms of other input costs, and I will explain the drivers. And what we can expect in terms of evolution on this area going forward.
On top of that, indeed, we had this €77 million of negative intrinsic performance. Most of it and even more than that has been driven by the very unusual events we faced on the manganese ore business with the railway in January and in April. And at the same, I will come back to what it means going forward. And that’s really something and important to share with you this morning that we are back to normal in this operation. So that’s why it’s important to highlight and to isolate this impact in this variance.
Two things now, I would like to focus on which are positive. I’d say that whether there has been performing very well in the first half, it’s been an additional €63 million of performance year-over-year. So that’s remains a very successful story. And the other thing I would like to highlight is the €21 million of positive variance in terms of cost reduction and productivity. This is a start of actions we have implemented to cope with the evolution of the environment. And that’s something we are developing accelerating in the same I will detail that a bit later on.
So I said it’s really a strong news to share that despite a very challenging environment, and that’s really the result of having now weather be as strong in our performance versus what it was a few years ago. Despite this very challenging environment in H1 we’ve been able to generate a positive net income close to €100 million. So that’s really a strong message explaining what is the new Eramet. And again, this number and let’s keep in mind it is before we will be in the recent business, which is still expected to come in production at the beginning of next year. So that’s something we’ll also detail a bit later on.
Given the evolution of the environment, we have also ensured a strict control of our CapEx, because clearly, the generation of operating cash flow was not as strong by far as it was last year. So we were still planning to invest in our activities. And we have decided to keep it under strict control. And you will see what it means also for the full year. We keep investing, and we believe it’s important, we don’t want to do what we could have done in the past to stop and go on some projects. So here, that’s why it’s important to keep in the pace on the growth projects. One of them is of course, the lithium project and the same will detail a bit more later on.
The other one is to make sure that we sustain the significant growth we have generated on our manganese ore business, both at the mine and also on the railway to make sure that we have strong capability to support the growth we have generated there. So as you can see, actually, the manganese ore business between Comilog and Setrag was €81 million of the €85 million of gross CapEx we generated for the first time for this year.
Also, and that’s something which is to be highlighted in terms of strong control on our side, we have reduced in H1, our working capital. And I want to emphasize the fact that we are usually building up working capital in the first half. So being in the situation to reduce the working capital in absolute value in the first half is a strong performance.
So it was generating as you can see, close to €100 million of cash in this first half. The receivables are clearly reducing, because the selling prices are reducing. It is being said, when we make the analysis in terms of days of sales outstanding in terms of DSO, it’s also reducing versus what it was at the end of June last year and what it was at the end of December.
And in terms of inventory, being in the situation to reduce the inventory value, both versus last year in June, and in December is a strong signal in a context where we have not yet seen the reduction of our input costs.
So all of that, in terms of cash management is also adding, as I said before, to what we have started to do in terms of cost reduction. We have detailed plans with all our operations, and it’s something we’ve done with them to improve EBITDA via different items, different toolbox, we have in this kind of situation, ensured that we put strictly our fixed cost under control, that we also optimize the productivity of operations, both in terms of volumes, in terms of mix, in terms of grades.
And I will give you a detailed example afterwards when we’ll talk about manganese ore business and also to continue optimize the production in situation in our smelting activities especially where we have demonstrated in the second half of last year that we are trying to adjust where it is necessary when the market is not there when the pricing is not there to actually reduce the production and to optimize our energy our energy cost.
And again, I want to emphasize in H1 we have reduced — we have improved our productivity and we have reduced our cost by €21 million versus the same period of last year. With the plan we have developed we are targeting at least twice this amount in H2.
In terms of net debt evolution now, so as Christel was saying at the beginning, we have increased the debt in the first half. Clearly, I won’t detail all these numbers, but a couple of items I want to provide. The first one is when we looked at the CapEx earlier, so I say that the reported CapEx number is €356 million euros. Let’s keep in mind that out of that €93 million is financed on the lithium project by our partner Tsingshan. So it means that net cash the effect on our debts in H1 ’23 has been €263 million. That’s the first topic I wanted to highlight.
Second topic, it’s also confirming what we said during the finalization of the session of Aubert & Duval and Erasteel, that between the negative cash flows of these two businesses and the proceeds of sales, it will be more or less neutral to our debts and to our free cash flow. This is demonstrated here, as you can see, because it’s the two boxes in green, more on the right of the graph, which is showing that we have minus €5 million altogether. And again, this is helping us to focus on the new Eramet on the value creation activities that we have. And doing that with a neutral effect on our financials on our debt is actually something to be positively highlighted.
We have been very active in the first half in improving our financial profile, and especially audit maturity. So one item was to extend and actually to expand the term loan, which was expiring at the beginning of next year. So now it is with maturity in ’28, for an overall amount of €550 million. That’s one. Second, we have issued a bond in May, and I will detail that afterwards, for a value of €500 million expiring in ’28. Our RCF has also been extended by one year, until June of ’28.
So all together, we have increased our maturity by almost one year. So it was a bit more than two years. At the end of last year, now it’s three years. So this is already a very significant improvement. Our liquidity is also very strong. It was a case at the end of ’22 if you remember, it was €2.6 billion. And at the end of June it is 2.5. So it’s mean that despite the consumption of cash that I was telling before, we have been able to maintain a very strong level of liquidity.
And this is before what we have announced yesterday, which is the signature of the prepayment on the lithium carbonate with Glencore, which will add another $400 million of liquidity that we can withdraw and will more than likely withdraw in the second half of this year. So the deal itself is only positive for Eramet, because it’s providing money.
That’s a co-marketing agreement that we have agreed with Glencore, which means that we will also have access to the market. And that’s something which is very important and we’ll be able to benefit with Glencore of have knowledge of the markets altogether. And the last piece I want to be really clear, it’s an agreement which is in the link two volumes of lithium carbonate, but this will be sold at market price. So we have not locked in any fixed price.
So as I said, it’s only positive items for our financing and it was confirming actually, the value the players on the resale market are seeing on our assets in Argentina. And that’s something we are really very happy to announce today.
As I said before, we have indeed issued first time a sustainability linked bond in May and for the first time as well rated bond, which by the way, with the rating which was provided by both Moody’s and Fitch is confirming the financial stability and robustness, which is something we confirm and which will definitely help us to develop the growth projects we have on our portfolio and we keep working on as Christel was mentioning earlier.
So, what does this mean? This means that we are keeping a disciplined capital allocation. And this remains our priority. We have not changed a needle to what we have seen in the last couple of years. The first priority is to ensure a low leverage, which means a targeted leverage of below one on average through the cycle.
I say that if we look at the situation at the end of June, despite a very challenging semester, we are at 0.7 and we are also willing to maintain a very strong balance sheet I couldn’t be more detailed in what I’ve said before about the level of liquidity and the extension of the maturity of audits.
We as a second priority are focusing on growth capex and that’s something we have done in H1, will continue in H2, we’ll come back to that later on. And the sole priority. And we have done that in ’21 in ’22 is of course, to reward our shareholders for the long-term commitment, this remains the three priorities in that order.
So I will now provide a bit more details about operational performance in H1. First, clearly as said, it’s been a very complicated semester for manganese ore. I will be a bit more detail afterwards, with the minus 27%, all of it is linked to the situation with a landslide at the end of December stopping all activities in January. And the additional issue we faced in April.
We have had a very strong performance in Weda nickel, same I will details that later on. SLN has been a challenging semester in terms of financial performance. But in terms of operational performance, as you can see, it was up versus the same period of last year by 18%, a 1-8 in terms of operating mining production.
And this last piece, which has been problematic, and it’s very this one, specific to H1 as well, concerning mineral sands, because on this year [ph], and we’ll see that in numbers afterwards, we have faced issues with rage in January, everything is sold, it’s back to normal, but it was impacting the first half.
We also in a much lower grade zone. And we use that to start as a year. It will be improving going forward, and ETI, we have stopped, or we have actually realigned the furnace, which was stopping the production for three months. So that’s the reason why you can see such a significant reduction year-over-year. The same, it’s the usual 10 years maintenance, we have to make these on this kind of furnace. And this was anticipated, so no surprise there.
One thing, which requires to be explained with a bit more numbers and figures is indeed a very sharp decline we’ve seen in our selling prices impacting all our products. Again, most of it was anticipated, but it is very sharp. And the best example I can give is on the manganese alloys business. As you can see, on the bottom left curve, it has been reducing by 48%, so divided by two, between H1 of ’22 and H1 of ’23. It says back to historically more normal pricings is being said, it’s been on a very quick manner, strong reduction of these prices. And by the way, it’s also as we said before in steel, pretty high input cost consumption and I will provide you a bit more detail afterwards.
The other one, which is also significantly reducing is ferronickel, an NPI, because it’s been reducing by 31%. So this is divided by — or not divided by three, it’s actually one third of reduction. So that’s the reason why the financial performance of this was complicated in H1.
So I say that I wanted to explain a bit more why we don’t see yet as a reduction of input costs, especially the reductions that we could have anticipated. It’s because of two reasons. The first one is because following the war in Ukraine, at the beginning of last year, we had to change the supply of our reluctance and mix accordingly, moving more out of nut coke to low force coke out of Colombia, and this is more expensive coke. And also and that’s the second reason of the increased cost.
We have a lag between the time we purchase and the time we consume, which sounds pretty natural when I explain it like this. But this is something to be taken into accounts and the lag is between three to five months. So when we make the overall analysis between H1 of the last year and H1 of this year, we have actually seen an increase of the average cost of consumption by 39%. So as you can see, it’s reducing versus what it was in H2 of last year. So we start to see a reduction but it was not yet reflected in our financial performance in H1. This is also suggest that it will and should go better in H2.
Freight cost, won’t spend too much time there. At least there are some positive news in this overall challenging market environments. So we’ve seen a reduction, a pretty sharp one. And I didn’t focus there on the variance analysis before, but it was representing a €50 million in the comparison versus H1 of last year. And as you can see, this is expected to stabilize in H2 of this year. So it won’t be such a strong positive comparison to last year because it was already starting to reduce in H2 of ’22. But this will remain normally something supportive to our margin.
Moving to manganese BU, so we’ve said it a few times significant drop, and the major drop, actually of IBD, and free cash flow in H1, with two main drivers. We have detailed enough I think the selling price not to come back on to that. The other one, and we have also mentioned it a few times. But I think it’s important to say that, again, a big portion of drop, obviously EBITDA on the manganese ore business is coming from this very exceptional logistic incidents, which happened in the first half of this year.
Now we are back to normal. And that’s the most important message I want to convey today. We are back to normal, we’ve transported more than 700,000 tons in June. The trend in July is also very positive. And we are forecasting to be in the same trend going forward. So that’s the most important is and the work, which has been done by the teams to solve the issue, which was faced after the earthquake in December leading to this landslide, honestly has been a tremendous work to be back on track. And that’s also something we want to highlight and showing the agility we can demonstrate in very tough situation.
So now if we move to the market, all the trends we are seeing are not suggesting that we would expect a strong increase in the coming months. So there will be recovery at some point in time, but we expect H2 to be more or less stabilizing. And you can see the fundamentals of the market, during this first half.
In terms of production, so I’ve already mentioned what happened in H1 and what we expect for H2. We need also to keep in mind for manganese ore that it’s follows four years of just outstanding growth because we have generated this 80% growth between 2018 and 2022. So clearly, H1 is an anomaly in this situation, we understand why we explained why. And again, we still target to achieve more than 7 million tons of both production and transported volumes in ’23, which will be led by a very strong H2. And again, this H2 is in line with the pace we have recovered in the last couple of months.
Manganese alloys margin, so I’ve said one of the reasons of the quiz — of the squeeze I’m sorry, the very sharp drop of selling prices combined with maintain pretty high level of input cost. And by the way, was diverse detailing for the reluctance is true as well for the manganese offers for manganese alloys. Because what was actually consumed and what was in the COGS in the first half was coming from purchase in the second half of last year. So this is a reason why the margin were dropping that significantly in H1. Because it’s really a squeeze effect that in some kind of seesaw effect that we have suffered in H1 due to the evolution of the input cost, which were higher versus what we had in H1 ’22 and a very significant decrease of selling prices.
Moving to nickel, as it’s been the case for the last couple of years. It’s still a story of two tails with a very significant success story with Weda Bay. And with very challenging financial performance for SLN. I’ve said it before SLN a really which needs to be analyzed with the evolution of the market, because in terms of both operations, especially mining operations, and in terms of fixed cost management, it’s been actually pretty solid first half.
Moving to the market, so as said, very significant decline of selling prices in the first half as well. We are not expecting a strong recovery in H2, given the same comment as for carbon steel. The expected evolution for the coming half on the overall market evolution, especially on the stainless steel, because it’s been, honestly very depressed in other areas, except China in the first half. And it’s been especially the case in Europe. We don’t really expect to see a significant increase.
I want to remind you one thing when we talk about nickel prices, even if we’ve said it a few times already in the last two years, but this is a confirmation in H1, the prices of ferronickel are not anymore at all linked to the LME. So indeed, LME has been stood up very high level in H1, even if it was also reducing versus what it was last year. But now, really the prices we sell nickel as a ferronickel are much closer to the NPI.
In terms of performance for Weda Bay, again, I cannot say differently, that it’s been an amazing performance the continued one. So, as you can see between ’21 and ’22, it was multiplied by two, between H1 ’22 and H1 ’23. It’s been almost the same because it was an increase by 80%. And this is not over. Because overall, now we have confirmed a new guidance for the production and sales of nickel or out of Weda Bay sold to its customers at 35 million tons in ’23.
The previous guidance was at 30 million tons. So this means that we’ll compare a 35 million tons to a ’21 Last year, which was already as the remainder as the biggest nickel mine in the world. So now we are becoming even stronger. So it’s mean that is a very strong result EBITDA and cash generation we have seen in the last couple of years is expected to continue.
And now if I move to SLN, clearly more challenging in terms of financial performance for the reasons I were describing with negative EBITDA, as well as negative cash flow. One comment I didn’t make before and I think it’s important to understand it is SLN is facing sensitization and for manganese alloys, and with unfortunately, much stronger effects in terms of overall performance drop up of selling prices which maintain very high level of input costs. So is that something that’s the main driver of this financial performance?
As I said before, in terms of operation, it was increasing by 18%. So it’s not a small increase, the level of exports has not been increasing, on the other hand, for two reasons. The first one is because we want and we are optimizing the ore which is sold, which is sent to the plant to be able to optimize a ferronickel production, that’s one. Second is also because unfortunately, we are facing permitting issues, which generally are not acceptable on some of the mining sites, and especially and that’s something we have said in our press release, especially at the pump site.
To finish this description of our operations in the first half, we have also strong evolution in mineral sands. I won’t provide much more details. I’ve said it before the main two drivers issues on the dredge in January are fixed now, so we expect a much stronger H2. And so it’s totally back to normal, and ETI very specific semester because of the realigning which was for more than half of the semester. So that’s the driver of the of the decline in terms of production EBITDA and free cash flow, being precise that the operations are back since the beginning of June, and they are running smoothly currently.
So, these are the details of our H1 performance, both financial and operations. And I hand it over again to Christel, who will detail where we stand on our projects.
Christel Bories
Thank you, Nicolas. Clearly, I updated you on many of our projects in my introduction, but what I would like to do here is to zoom on the one that is the most advanced, which is our project in Argentina in lithium. So clearly and you can see that on this slide, the lithium market dynamic remains very positive, very good with steadily growing demand with still very high prices. And yes, they have dropped from $80,000 per ton to around $40,000 per ton today. But it’s still very high price.
The long term outlook for the price is according to the consensus is today between $15,000 and $20,000 per ton, which is still far above our planned cash costs. So it’s a very good business model for us. Our Phase 1 project, so in Centenario in Argentina is progressing well, as you can see on this slide. The construction that has been launched in ’22 has achieved a 60% completion rate at the end of June. The production should start as planned in Q2, 2024. And the achievement of the full ramp up to 24,000 tons of lithium carbonate battery grade is expected by mid-2025.
So the total CapEx for this Phase 1 should be around $735 million, mainly financed by our partner Tsingshan through an equity increase. And based on the projected long-term price consensus, and very competitive cash position, because we expect to be in the first quartile of the cash cost curve. These plants should deliver an annual EBITDA of around $300 million. So quite significant.
This project as use the DLE technology Direct Extraction, which is the most environmental-friendly today, due to its very high yield and very economical use of the brine resource. We also apply there our highest CSR standards as everywhere in connection with the local communities and also with a lot of improvement even on the cash process for water recycling.
And because we have very competitive positioning on these deposits, and with this technology, we have decided as already communicated earlier this year to accelerate the Phase 2. And we should be in a position to make the final investment decision of a first tranche of this Phase 2 of 30,000 tons of lithium carbonate during the second semester of this year. This would trigger an early CapEx of $90 million, as soon as 2023, 50% of which being financed by Eramet. And as mentioned already, by Nicolas to finance this project and potentially others, we have signed a joint marketing agreement with the Glencore with a prepayment of $400 million, and the volume of 50,000 tons of lithium carbonate from Phase 1 of the project which is equivalent to a commercial contract of approximately five years, starting in 2025.
So, the first tranche of this Phase 2 should be followed by a second one in the future. And so we plan overall to have a total production higher than 75,000 tons of lithium carbonate per year battery grade in the future.
So, as a conclusion, we clearly don’t expect significant improvement coming from the market in H2. You all know that the geopolitical and macroeconomic environment is today very uncertain, not going in the right direction. We keep high interest rates, high level of inflation, which continues to wait on all the groups market. The rebound initially anticipated in China has not yet materialized in 2023, even if we see some incentives coming and we have seen that it has already had an impact on the stainless steel market, but nothing material I would say so far and the decline of the construction sector in Europe and North America, as well as in China continue to wait on many group’s activities.
So, overall, the demand from all the underlying markets for our products have remained quite sluggish and resulting in a continuation of the downward trend in prices in line with what we have observed during the first half of the year. So, in line with market consensus, as you can see on this slide, we have revised down our manganese ore price assumption and nickel prices assumptions.
And on the operational front, as explained by Nicolas, we should be back to a much better operational performance with IO volume being back to normal operation in Gabon, which is a strong contributor to our results, and in Senegal, and also, we should benefit in H2 from a better seasonality. As you know, H2 is always better in terms of seasonality and for the mining activities. So, we should have a much better second half. And moreover, we should benefit from our reinforced focus on cost reduction and cash control, and also from the decrease of the headcount price as already mentioned by Nicolas.
So, our key volumes objectives shown on this slide, are now the following. We should be above 7 million tons of manganese ore transported in Gabon to reflect the H1 issues, but also the fact that we are back on track for H2 with strong performance expected. And we have upgraded our volume guidance on Weda Bay because of the extremely good performance of Weda Bay and steady demand for this or Indonesia to 35 million tons of nickel ore at Weda Bay, so plus 5 million versus our last guidance.
So overall, all these leads to our revised adjusted EBITDA of around €900 million, which is lower than then before, but still significant level and due to the active cash management and despite the planned spend of lithium phase two starting this year, we have also revised down our CapEx from €600 million to €550 million.
So clearly, unfavorable prices and logistical incidents not resolved have penalized our results in the first half. And in the second half, we of course remain focused on the performance of our operations and the strict control of our expenses, and we should be able to deliver much better results. And thanks to the transformation that we have achieved in the recent years, the refocus on co-activities that are much more robust and also more fully the financial structure that has been explained by Nicolas. We remain agile and we are staying the course, pursuing our key growth projects in the energy transition.
And so, last but not least, I would like to conclude that this presentation will save the date. Because we will organize on November 13, our first Capital Market Day marking Eramet’s entry into its new era. It will give you the opportunity to attend in-person or remotely an event where you will be able to learn much more about our operations, our strategy and our new CSR roadmap. You know that we will communicate a new CSR roadmap for the next few years. And I’m sure it will be very useful as Eramet is still quite unknown to many of the investors. And I think it will be very also useful to meet the management and the key operational people of our management team.
So thank you very much for your attention. And now, Nicolas and I are ready to answer your questions.
Question-and-Answer Session
A – Christel Bories
So we’ll start with the questions in the room. We have one here. So if we can have one, mic?
Q – Nicolas Montel
Hello, Nicolas Montel, Portzamparc. I have five questions. First of all, what is your target for your audition cost plan? If you have one. My second question is on SLN. What is your plan to reduce your cash cost, because you have a huge loss and it’s not the first time? So what is your plan for SLN? Third, you have talked about a bidder for your ETI plant, can you talk a little bit about that? Is it the same buyers that last time in 2020?
Fourth, where is tranche in your Phase 2 project? Is it because it’s in term of CapEx you are not about to do as Phase 2 in just test 1 tranche or is it something else? And my fifth question is about you have other operating non-recurring expense of €27 million. What is it about? Thank you.
Christel Bories
So, Nicolas, I suggest that you answer the first question on the cost reduction plan and the last one on the on the €27 million. And then I will take the other three.
Nicolas Carre
Okay, thank you Nicolas for these detailed questions. So, for the cash control activities, as I said in the presentation that as you have seen, we have generated €21 million in H1. And with the additional activities, we are putting together, it is — we expect or we can target at least twice a month in H2. So, you can make the addition. And I didn’t actually mention it when we talked about the cash cost of manganese ore. But one of the key activities now, we have all the modular plans or the modular washing plants in Okouma in the new plateau Okouma, which will have especially one very positive effect of increasing the average grade.
We are likely targeting to be improving the grade by one point, which would actually be also one of the strong support of these actions. And it’s one of the numerous actions that we have on the productivity improvement as well as cost reduction plan.
I will name another one, which is something once again we have already done in the past, which is given the evolution of selling prices in some of the products of manganese alloys especially the commodities, we may actually reduce further the power to be able to avoid additional cost and to actually be potentially able to resell electricity and the solid hedging positions we have in these businesses. So, but back to your question initially, so we plan to accelerate what we have already been able to do in H1. So, I will I will give you the number by definition if we double the efforts, so it will be at least €60 million.
Christel Bories
The other one on the 27?
Nicolas Carre
Yeah, maybe we just make the link with the presentation and I will come back to that.
Christel Bories
Okay. Maybe on the other three, so on the offer that we have received on ETI. First, it’s unsolicited offer, ETI was not and is not for sale today. We have received it two days ago, so we need to analyze it. Of course, there is a number, a price attached, but there are also elements of SBA. And what we don’t want for the timing, I think it’s too early to comment on the buyer, because we just want first to analyze the offer.
We will obviously be sensitive to the feasibility of execution of this deal. We don’t want to be trapped, as we did in 2020 with a process with the antitrust authorities that could last many months and then come to a negative conclusion. So we’ll be very sensitive to that analyzing the offer.
And in terms of pricing, because I anticipate just a question that we may have on that, just to give you an order of magnitude, it represent 12 times EBITDA 2022, for the assets. So it gives you an order of magnitude, because it’s something that we don’t publish separately.
On the SLN cash costs, I think the issue at SLN, unfortunately, is not in what kind of cost reduction we could do ourselves in managing better, the personnel cost productivity there. As you know, the nickel in Caledonia is facing very structural issues. And all the meteorologists are losing a lot of money in Caledonia. And by the way, we are the one losing the least. It’s not proud of it, but it’s the reality.
So I think we are operating the best way possible in Caledonia. The structural issue are the energy price that remains very high and much higher than any other competitors. And the second structural issue is the access to the mines. And we are in the process of putting the Okouma mine in care and maintenance just because we are not receiving as permitting that we have asked now four years ago from the Northern Province because of political issues.
So it’s absolutely key now that those cultural issue are solved. It’s nearly in our — it’s not in our hands. As you know, in fact, the President Macron was in Caledonia, these last two or three days. They have started a new process. They have made a thorough study at the level of French State on the situation of the nickel in Caledonia.
Now, it has been communicated the result of these studies has been communicated to the Caledonians. And now they are working, they have created a task force together with the Caledonian to bring solutions, long-term solutions to the nickel in Caledonia. So it’s not in our ends. What is very important and we keep repeating and it’s clear for everybody among the states or in Caledonia is that a Eramet cannot continue to have these burden on its balance sheet.
So we will not inject cash anymore, we cannot continue to accumulate that on our balance sheet because of SLN. So, this is a part, I would say of the facts of diagnosis. And so we will see what kind of solution is brought in the coming six months because the Minister of Bahamas [ph] has stated that he would like to have a solution by the end of the year coming from this group.
So, these are structural issues. And, of course, we are doing our best to optimize the cash costs. But without this being solved, it will not be possible to move the needle significantly.
And on your last question, why two tranches for the Phase 2, because it’s the optimize size for the technologies that we have. And it’s something we are preparing the infrastructure for the second tranche, but it’s — so we have — there are some costs in commence, but to just large infrastructure around. But it’s optimized to go that way.
So we have the bottleneck, as you can see, versus Phase 1, because phase one was 24,000 tons. Now we have a tranche of 30,000 tons we chose that we continue to improve the process. And also with this new, I would say generation of DLE we will use even less water and much less water even than the first one which was already much more economical of the resource than the other technologies.
So we are progressing, but it’s not optimized size in order to progress.
Nicolas Carre
Now, I will go your fifth question, Nicolas, the non-operating expense. So it’s actually twofold. One is the additional impairment, which is to be booked. And I’m sure you have in mind that we booked an impairment when we talked about this at the end of last year. So especially when we talk about the necessary investments, we do in the plans. Now what we are doing is actually to book an additional impairment and which is in line with the accounting practices. The other half to make it simple is coming from the expenses which is not booked into CapEx, but the expenses. We are spending for the project especially for the lithium project we just talked about as well as for the Sonic Bay project.
Nicolas Carre
There is another question. Yeah.
Julien Onillon
Yeah, Julien Onillon, Stifel. I got two questions. First I would like to come back on SLN. There is two problems clearly, a $15,000 for ferronickel, you make losses where nickel pig iron processor makes money, makes all money still. So it will not be solved, if you were a rational company or say a fully private company, you will have closed your ferronickel production plant, probably because you make cash losses and it will continue for a period of time.
So beyond that, what you mentioned about structural solving problems, but is it any other solution that closing this ferronickel plant for now? Second question I would like to make on the HPAL project which we are delaying eventually its decision. How confident are you on the cost competitiveness of this project compared to the new route which has been developed to produce a nickel battery, which is using nickel pig iron and matte. It’s developing quickly. We don’t know exactly how cost effective it is. What’s your view on that, because it’s a huge investment project potentially for you? And for BASF, it’s small compared to the size, but for you it’s big. So, you better not to make a wrong decision on that.
So, how is your vision or visibility about effectively how cost effective is this is a Tsingshan project the Tsingshan or other development using the PRN route and make route compared to you route you are working on.
Christel Bories
Thank you for these questions just on SLN. SLN, you said that the only solution would be to close Doniambo, so the plant. Yes the plant is much higher cost because of — and a big part of that is energy price. Today we would have energy price that we have with the Ahanne [ph] in France for our manganese alloys plant in [indiscernible]. We would have today positive cash flow at SLNs or breakeven cash.
So a lot is coming from the energy cost that as to be subsidized in the future. There is no other way than for doing it. And if the nickel ferronickel price continue to drop, there should be also other kinds of subsidies or help in order to maintain these kind of businesses in Caledonia. That’s why I’m saying that it’s not any more solution that is in our hands. And we need to make sure that it does not bring any additional burden on our balance sheet. So there are several solution of doing.
If there are massive subsidies coming from the French state, then SLN will not make any more losses. So it will not be again a burden on our accounts. Or we can be diluted in the shareholding and not consolidated SLN anymore. There are many other options but for the time being, it’s something that is, again discussed, there are many options on the table, and we don’t know which one will be chosen.
To answer your question about the closure, we are also responsible player. We know the huge impact that the closure of Doniambo would have in Caledonia. So yes, maybe we would have closed this plant. But it’s not that straightforward when you look at all as the ripple effects and the consequences it could have in Caledonia. So it’s not an easy such an easy decision to be made.
Julien Onillon
It’s clear the appetite as of course, as a real, of course tough decision and very, very strong consequence for the New Caledonia. But my question behind that is what power you have to effectively get because to make you’re right, to make profitable at the end of the day, the only way to be highly subsidized in terms of electricity in terms of energy cost. And the only way where your plant could be comeback profitable some way, which means the state somewhere to take this is help here, what’s your power in that?
Christel Bories
Not to inject money anymore.
Julien Onillon
Yeah. But it is not to say, well, if we not be subsidized.
Christel Bories
Then there will be a bankruptcy. And then it will be the decision of the local court to decide what will be the future of the company doesn’t mean that it will be closed, maybe some somebody else, the local authority, et cetera, will will take it over. That’s why I’m saying it’s clear –bankruptcy doesn’t mean automatically closing. And it’s there, the only the — red line that everybody knows, and you all know. And I will kept repeating that for a long time, is that we will not inject any more cash in this company and we don’t want that accumulated — that will affect our balance sheet. That’s the point.
Then once having that as a base facts. There are many other options. And again, if they don’t, I mean in other option, the bankruptcy is one. And we are ready to go there.
Just to answer your second question. The second question is the HPAL versus nickel to max. I mean, in terms of course, we know very well, the cost of the nickel to Max good because we have an NPI closed as you know in Weda Bay together with Tsingshan, so we perfectly know the cost. There are many NPI plants in the Weda Bay industrial packers that are producing max.
So we perfectly know the cost. The cost is much higher than HPAL. So today, it’s an easy way because it takes time to build HPAL, et cetera. But it’s an easy way to have nickel for batteries. But to give you, at the end clear on top Tsingshan themselves. They are building two big HPAL plants right now. Because they are convinced that is the best route in terms of cost and in terms of CO2 emission to do nickel for batteries.
Presently on Halmahera, the Weda Bay Island they are building two HPAL plant plants. So it’s the best technology today to enjoy nickel to matte is an interesting technology because it’s high CO2 emitting, and it’s much higher cost than HPAl. Any other question?
Unidentified Analyst
Hello, everyone. [Indiscernible]. So three questions. Could we expect a rebound in terms of manganese alloys production in H2, or a stabilization versus H1? Second question in your lithium business, will you try to negotiate purchase price agreements to lock in prices, for instance with European carmakers in the future? And the final one? We saw some nationalization plants in Chile. And you recently opened enough an office in the country? How could you operate in this kind of an environment? And what is your take on this decision? Thank you.
Christel Bories
Okay, so maybe you want to take the first two?
Nicolas Carre
Yes, I was. I wanted to offer that. So thank you for the, concerning manganese alloys, two things, which we’ve tried to clarify in the presentation. First, we are not really expecting a strong rebound of the activity of carbon steel in J2. So it’s not a matter of production, actually, it’s a matter of having the market opportunities.
Second thing also I was saying is that we will also be agile as we have done in H1 last year. And if we see that, due to potential pressure on pricing given coming from other players, especially out of India, for example, which will lead to very low pricing, we still too high input cost will do what we have done last year, meaning that will address the production. So again, could there be opportunity, yes, there will be opportunity in the case there is a market rebound.
Today, it will not be responsible on our side to say that we see that market rebound. So it’s more something we’ll adjust. And we have done that already to ensure that we remain profitable in what we are producing. That’s concerning the first question.
Concerning your second question, which is indeed important. So, we are clearly and that’s something we have already said in our intern instances that we are in touch and in discussions with OEMs for especially, the coming Phase 2 of our lithium project. I really want to clarify one thing to be careful, we won’t take any agreement which are looking at prices.
It will lock potentially volumes, it could look premium or discount depending on discussion we have with our customers, but it will be to market price evolution. So we will not do what we have never done in our businesses is to lock prices, which honestly will be a pretty difficult situation or decision to make with such a market like lithium, where we indeed on the debate pretty strong steel evolution of the market and those are prices.
So to summarize, yes, we are in touch with OEMs. And we see the value to ensure that we can also work with them value on those ways, value for them but you for us to ensure that we can get commitments for the — especially for the volumes of the second phase, but it won’t be to lock prices.
Christel Bories
And I can tell you that there is a lot of appetite of OEMs for this production. Just to answer your last question about Chile. Chile is the best resources in terms of lithium brines, high grade, very good cost positioning, everything. Just to give you an idea, today there are 20 projects in Argentina. They are not in Chile because of the difficulty of this national policy.
The Chilean government and President Boric was in France last week. And I had the opportunity to meet him, and the ministers, they are fully aware of these difficulties, they definitely want to diversify their source of investors, they don’t want to be to say bluntly, too much dependent on Chinese investment. So they are welcoming Western partners.
We are positioning ourselves as a responsible partner with good technology as a like our DLE technology. And you may have read, by the way that they say that they will give exploration license or a permitting only to DLE technologies. So it’s restricting the number of potential players. So we are quite well positioned. We know how to operate with state-owned companies. Because in front of us, we have companies like the companies like Codelco, Enami. We are operating in other countries, with state-owned companies in Africa, notably. So at the end of the day, we think we can find a way to have deals, and be well positioned to get access to new concession, initially.
But today, it’s taking a bit of time. But again, this government is well countries that they have to accelerate if they don’t want to miss the opportunity of the new projects in the lithium industry.
Unidentified Analyst
Okay, thank you.
Christel Bories
Any other question? So there are questions on the web.
Unidentified Company Representative
Thank you. So we have three remaining question from Maxime Kogge at ODDO BHF. What could be the start date for lithium Phase 2? Will you be able to deduct the $400 million advance from Glencore from your net debt or will the cash be offset by your financial liability? And again on Sonic Bay, do you think that the battery grade project in Sonic Bay still make sense given nickel price have fallen a lot and a lot of Indonesian capacity has already come on stream in recent months or is about to be launch?
Christel Bories
Just maybe you can answer on Glencore, I will answer the other two. To start to potentially start date and again the FID which will take place only in H2. So we will be able to communicate to start date once we know when we will start construction. But basically, if we have the FID second semester, we could be in production beginning of 2026.
On Sonic Bay, of course, we are monitoring all these. And it will be part of the FID decision. If we again — have the feeling or more than the feeling but we make the analysis that the profitability of the project is not anymore in line with our targets and our criteria economic criteria, because of the nickel price, we will not make the final decision.
For the time being, it’s still a profitable project with the data that we have. Also, because the cash –cost positioning Indonesia is very low. Operating cost very competitive. We will process here of Weda Bay and we know that ore price in Indonesia is lower than in the rest of the world. Not talking about the cost but the price. And because it’s even much lower.
So today we still have good economics for this project. But of course, we are monitoring that very carefully. And it will be part of the decision of course. And we will not make a stupid decision especially because it’s a significant CapEx for Eramet. So we’ll have to be fully convinced that it will create a value.
Nicolas Carre
And on the Glencore prepayment, so $400 million. So at this stage, the analysis of — the accounting analysis of this agreement is that it will be booked as financial debt to your question Maxim. So, this will mean indeed that it will improve the liquidity but it won’t improve, per se is a net debt. It’s as of two days analysis. And clearly we will look at the way it could be considered differently. But that’s the best answer I can give for today.
Christel Bories
No other question. No question in the room. So we, I think right on time. So thank you very much for your attention. And so we definitely are more optimistic on our performance for the second half. And I can tell you that all the teams are very focused to deliver a much stronger H2. So, thank you.
