Albemarle Corp (ALB) — Q2 2022 Earnings Call Transcript

Thank you, Nadia. And welcome, everyone, to Albemarle's second quarter 2022 earnings conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer; Raphael Crawford, President of Catalyst; Netha Johnson, President of Bromine; and Eric Norris, President of Lithium are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance, and timing of the expansion projects may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation. That same language applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation. And now I'll turn the call over to Kent.

Thanks, Meredith. Thank you all for joining us today. On today's call I’ll highlight our second quarter results and achievements. Scott will provide details on our financial results, outlook, balance sheet, and capital allocation. I’ll then close our prepared remarks with an update on our operating model and strategic growth projects aimed at further strengthening our long-term financial performance and sustainable competitive advantages. Albemarle’s leadership position in Lithium and Bromine, coupled with our team’s ability to execute in the current inflationary environment, led to another quarter of strong results. In the second quarter, we generated net sales of $1.5 billion, nearly double the prior year. Second quarter adjusted EBITDA of $610 million was over three times the prior year. Continuing the trend of EBITDA significantly outpacing sales growth. The supply-demand balances remain tight in the markets we serve. Strong market prices and our continued success in contract renegotiation drove the tremendous strength we're experiencing in our lithium business. As a result, we are again raising our 2022 outlook and now expect to be free cash flow positive for the year. Scott will review the key elements of that outlook later in the call. We are also successfully executing our growth strategy. Our Kemerton I lithium conversion plant in Western Australia achieved first product in July. I want to especially congratulate our teams in Western Australia for their hard work and dedication in achieving this goal. Lastly, we made a major announcement regarding plans to build an integrated lithium mega site in the United States. This will support our western expansion and the development of the battery material supply chain in North America. Now I'll turn the call over to Scott to walk through our financials.

Thanks, Kent. And good morning, everyone. I'll begin on slide 5. During the quarter, we generated net sales of approximately $1.5 billion, a year-over-year increase of 91%. This is due primarily to increased momentum in our pricing efforts as well as higher volumes driven by strong demand across our diverse end markets, especially for our lithium and bromine businesses. We saw volumes and pricing grow in all three of our businesses. For the second quarter, net income attributable to Albemarle was $407 million, compared to $425 million in the prior year. As a reminder, the year ago, quarterly results included a onetime benefit of $332 million related to the sale of Fine Chemistry Services. EPS for the second quarter was $3.46, a year-over-year improvement of 300%, excluding the onetime benefit of the FCS sale. This overall performance was driven by strong net sales and margin improvement, partially offset by the ongoing inflationary pressures we are feeling across all three businesses. Turning to slide 6, second quarter adjusted EBITDA was $610 million, up 214% year-over-year. The primary driver of the strong growth was higher lithium EBITDA. Lithium was up nearly $400 million compared to the prior year, driven by momentum in our contracting efforts and overall higher market prices. That's an increase of 350%. In fact, lithium second quarter EBITDA was greater than the EBITDA it generated in the full year of 2021. Bromine was also favorable year-over-year, up nearly 50%, reflecting higher pricing driven by tight market conditions and an uptick in volumes, partially offset by raw material and freight inflation. Catalysts was negative in the quarter as higher sales volumes and pricing were more than offset by cost pressures, particularly for natural gas in Europe and raw materials. Finally, we also experienced an overall FX headwind of $14 million for the total company. Moving to slide 7, we are further increasing our 2022 outlook from our last announcement in late May, primarily to reflect the expected continued strength in execution in our lithium business and further improvements in bromine. We now expect 2022 total company net sales to be in the range of $7.1 billion to $7.5 billion, up about 115% to 125% versus last year. Adjusted EBITDA is expected to be between $3.2 billion and $3.5 billion, reflecting a year-over-year improvement of up to 300%. This implies EBITDA margins are expected to improve significantly to a range of 45% to 47% for the total company. Together, this translates to updated 2022 adjusted EPS guidance in the range of $19.25 to $22.25, that is about five times more than in 2021. Additionally, we're increasing our net cash from operations guidance to a range of $1.4 billion to $1.7 billion, driven by our updated sales and margin expectations. We are maintaining guidance for capital expenditures of $1.3 billion to $1.5 billion as we drive our lithium investments forward to meet increased customer demand. Together, the midpoint of our guidance implies approximately $150 million in positive free cash flow for the full year. Further, if you assume our realized pricing remains relatively flat next year, we expect to continue to generate positive free cash flow in 2023 even with continued growth investments. Security supply remains the number one priority for our customers, and we are continuing to partner and work closely with them. We are pushing hard to meet those accelerating customer growth requirements.

Regarding the quarterly progression of sales and EBITDA, on our last call, we indicated that we expect results to be relatively evenly split among quarters. Given the underlying strength across our portfolio and continued momentum in our contracting efforts, we now expect second half adjusted EBITDA to be roughly 120% higher relative to the first half. Turning to the next slide for more detail on our outlook by segment. Our lithium businesses' full year 2022 EBITDA is expected to be up more than 500% year-over-year, up from the previous outlook for growth of approximately 300%. The improved outlook reflects renegotiations of pricing on legacy fixed-price contracts and continued strong market pricing flowing through our index referenced variable price contracts. We now expect our average realized selling price to be up more than 225% to 250% year-over-year. This is the result of our successful efforts to renegotiate legacy contracts and implement more index referenced variable price contracts, as well as a significant increase in index prices. From the beginning of the year to today, indices are up 60% to 130%. Our outlook assumes Albemarle’s expected Q3 realized selling price remains constant into the fourth quarter. There's no change to our lithium volume outlook for the year. We continue to expect year-over-year volume growth in the range of 20% to 30% as we bring on new conversion assets, plus some additional tolling. There's potential upside to our outlook if market prices remain near current levels or with additional contract renegotiations or additional tolling volumes. Conversely, there's potential downside with material declines in market pricing or volume shortfalls. For bromine, we are also raising our full year 2022 EBITDA expectations with year-over-year improvement in the range of 25% to 30% compared to the prior outlook of 15% to 20%. This revised guidance reflects continued strong demand and pricing from end markets such as fire safety solutions and oilfield services, along with other macro trends such as digitalization and electrification. We expect higher volumes of 5% to 10% following our successful execution of growth projects last year. For catalysts, full year 2022 EBITDA is expected to be down 25% to 65% year-over-year. This is below our prior outlook due to significant cost pressures, primarily related to natural gas in Europe, certain raw materials as well as freight, partially offset by higher sales volumes and pricing.

The large outlook range for Catalysts reflects increased volatility and a lack of visibility particularly related to the war in Ukraine. Given the extraordinary circumstances and the resulting changes in oil and gas markets, the business continues to aggressively seek cost pass-throughs, particularly for higher natural gas costs. The strategic review of the catalysts’ business is ongoing, but it is taking longer than we anticipated. As soon as we have any news, we will provide an update. Turning to slide 9 for an update on our lithium pricing and contracts. This slide reflects the expected split of our 2022 lithium revenues. Battery grade revenues are now expected to make up approximately 85% compared to 70% to 80% in our prior guidance, due to successful contract negotiations and higher market indices. Of the total battery grade revenues, 15% is expected to be from short-term spot purchase orders. 65% is expected to be from index reference variable price contracts. Pricing on these contracts generally reset with a three-month lag, and a number of these contracts do have floors and ceilings in place. The remaining 20% comes from legacy fixed contracts with price reopener normally every 6 or 12 months. Since we last updated the outlook in late May, we have successfully repriced a portion of these contracts to better reflect the current market price environment. This segmented approach to contracting gives more flexibility for our customers while allowing Albemarle to preserve upside and ensure returns on our growth investments. Our operations and project teams are also delivering volumetric growth. Slide 10 shows the expected lithium sales volumes including technical grade spodumene and tolling sales. In 2022, we expect volumes to improve 20% to 30% year-over-year. This growth is largely driven by our expansions at La Negra and Kemerton, the acquisition of Qinzhou as well as some additional tolling volumes.

Looking forward, we expect volumes to grow approximately 20% per year from 2022 to 2025, driven primarily by the ramp-up of new conversion assets. We see room for further upside from additional conversion assets such as our Greenfield in Meishan or additional tolling volumes. Turning to slide 11, our strong net cash from operations and solid balance sheet give us ample financial flexibility to execute our growth strategy. Our balance sheet is in great shape with $931 million of cash and available liquidity of $2.6 billion. Current net debt to adjusted EBITDA is approximately 1.7x. With rising EBITDA from higher pricing and volumes, we expect leverage to trend lower in the near term. This will give us plenty of capacity to accelerate our growth investments or value-creating M&A. During the second quarter, we extended our debt maturity profile through a public offering of senior notes, proceeds total approximately $1.7 billion, a portion of which was used to redeem senior notes maturing in 2024. 92% of our debt position is at a fixed rate, which buffers us against the impacts of the rising interest rate environment. Before I turn the call back over to Kent, I wanted to briefly review our capital allocation priorities and our ability to adapt to market changes while building durable capacities to support growth. Our capital allocation priorities are unchanged; we remain committed to strategically grow our lithium and bromine capacity in a disciplined manner. Capacity growth will also be supported organically by continuously assessing our portfolio and pursuing bolt-on acquisitions at attractive returns to strengthen our top-tier resource base. A perfect example of this strategy is the $200 million Zhangjiagang acquisition that is expected to close in the second half of the year. Maintaining financial flexibility and shareholder returns are also key capital allocation priorities. We remain committed to maintaining an investment-grade rating and a strong balance sheet to provide significant optionality to fund future growth. Finally, we also plan to continue to support our dividend. We are laser-focused on the durability of our business. The management team and the board regularly review our capital allocation priorities and have identified levers we can pull to quickly adapt to changing market conditions if needed. These include slowing non-growth capital expenditures, reducing discretionary spending and hiring, shifting production volumes to the highest demand markets, and accelerating partnering and tolling arrangements to support cash generation. Additionally, a downturn may allow us to take advantage of lower-priced acquisitions, capitalizing on the strength of our balance sheet. In summary, we believe Albemarle’s ability to maintain a focus on growth through all market conditions is strong, thanks to our operating model that Scott is going to discuss next.

Thanks, Kent. So let's turn to slide 13 to discuss our cost structure and how we are managing inflation. Our vertical integration and access to low-cost resources for lithium and bromine allow us to avoid the worst impacts of inflation and control our cost structure. For example, while approximately 45% of our costs come from raw materials and services, actually 20% of those costs relate to our own spodumene. The implementation of our operating model, the Albemarle way of excellence, is also helping manage costs. In 2020, we identified our supply chain as a key area for improvement. At that time, we reorganized to form a global supply chain function and implemented a new Enhanced Procurement strategy. That team's efforts are now paying dividends. Last year, our procurement team set a target to achieve $90 million in value creation by 2022 year-end. We are on track to meet or exceed that target by about 40%. About half this from cost savings with lower year-over-year costs. And about half is from cost avoidance, where procurement efficiencies have allowed us to realize below-market increases. An example of cost savings includes logistics efficiencies, minimizing material handling, maximizing equipment capacity, and shortening haul routes. Cost avoidance includes using fewer suppliers and pooling buying for key raw materials and services to offset inflation. In other cases, we've shortened supply chains to improve resilience and reduce total cost. This success is driven by diverse teams, including supply chain, procurement, and production scheduling. Thanks to everyone across the enterprise and around the globe. It took commitment from every individual to make this happen.

Our operating model is also focused on building the structure, capabilities, discipline, and design approach to enable faster capacity growth. As a leading lithium producer, Albemarle is investing in lithium production around the world, including China, Australia, and the Americas. This year, we plan to deliver projects that more than double our annual capacity from 85,000 tons to 200,000 tons by year-end. We are also progressing a portfolio of projects that can grow our conversion capacity to as much as 500,000 tons per year on a 100% basis. As you can see, the near-term projects are largely in the Asia Pacific region. Longer term, we expect to transition to a more localized supply chain in North America and Europe. Turning to slide 15, our capacity additions in Australia and Asia significantly enhance our ability to leverage our low-cost resource base. In terms of lithium conversion capacity, we've made progress on the regulatory approvals for the acquisition of the Qinzhou conversion facility. We continue to expect that acquisition to close in the second half of 2022. In the meantime, we continue to toll spodumene through this facility. As I mentioned earlier, Kemerton I has achieved first product. This important milestone signifies that the manufacturing processes and equipment can meet the project's design objectives. Our focus now is on qualifying our product with our customers. At our China Greenfield expansions, construction of a 50,000 ton per year lithium hydroxide conversion plant in Meishan is well underway. Importantly, with our ownership stakes at the Wodgina and Greenbushes lithium mines, we already have access to low-cost spodumene to feed these conversion facilities. The restart of the Wodgina lithium mine by our JV partner Mineral Resources is going well. We continue to negotiate agreements to expand and restructure the MARBL joint venture and we'll update you when we have more information. We also have a 49% stake in Greenbushes, one of the best lithium resources in the world. The Talison joint venture is ramping up chemical-grade plant two or CGP2 and has approved construction of CGP3, which has broken ground. Our intention is to ramp up lithium resources in advance of conversion assets. In the near term, we could be net long spodumene. If that's the case, we will elect to toll spodumene or sell spodumene into the market if it's economical to do so, and if it allows us to bridge until new conversion assets ramp up. Albemarle is the leading global lithium producer with a significant US presence and access to some of the world's best resources. As such, we are well-positioned to establish world-class production of battery-grade lithium that enables the localization of the battery supply chain in North America. This would offer important benefits to auto manufacturers seeking a de-risked local supply chain, more reliable logistics, and a reduced carbon footprint. We plan to leverage our Kings Mountain lithium mine, a top-tier resource, and build a multi-train conversion site in the southeast. This site will be capable of handling mineral resources from Kings Mountain, as well as recycled feedstock. This mega flex site would leverage Albemarle’s best-in-class know-how to design, build, and commission both resource and conversion assets. This creates significant competitive advantages for Albemarle and its customers, while also addressing the need for localized lithium supply to support growing demand in North America. In closing on slide 17, we expect to achieve significant growth milestones this year, thanks to strong end-market demand, as well as actions that we've taken to invest in profitable growth for lithium and bromine. Those investments are now paying off as we ramp up volumetric growth. To maintain our financial flexibility to fund growth through cash and our balance sheet, and to leverage our operating model to manage costs and execute our growth projects. So this concludes our prepared remarks. Now, I'll ask Nadia to open the call for questions.

Yes, good morning. Kent, your volume growth has been very impressive. Can you discuss your key steps you're taking at Kings Mountain in terms of building the mega site? What environmental permits do you need? Are you engaging with the community today? And the same question on Silver Peak? When you expand that what kind of production ramp-up can you see?

Right, so the two sites are slightly different in scale. And so Kings Mountain is a significant site, Silver Peak is smaller, but still the expansion is important. I mean, that is the only lithium source in the US today. But at Kings Mountain, we're early in that process. We're still in pre-feasibility. So we've got to do permitting. But we have done a lot of work already. We've done all of the necessary drilling, well, we continue to do some of the drilling to understand the resource at Kings Mountain. We still have to go through the permitting processes that we have to go through, but it's in pre-feasibility study. We feel confident we'll be able to get there at Kings Mountain, but there's a lot of work to do, including all the permitting.

Great, and then you have a strong balance sheet. You have been free cash flow positive this year. You talked about M&A. Can you give us some idea of what you would potentially be looking at? Would you look at technologies like direct lithium extraction? Or what geographies would you look at? Thank you.

Yes, well, I think it's what we've really always talked about from an M&A standpoint. We are seeking virgin assets that we think are attractive, so we would consider those as bolt-on technologies if we see technology to help us. Direct lithium extraction could be part of that. And for resources, we continue to be good on resources pretty close to the end of the decade. But we need to be planning now to build out our resource base past that. So I think those are the three primary categories.

Great, thank you so much for taking my question. Just turning to slide 18. The third and the fourth point, can you just give us a quick update in terms of some of the contracts negotiations on additional tolling? I mean, on the former, what percent are still up for renewal, and that have essentially given you the momentum to raise guidance twice in the last quarter and a half or so? Just any color you could offer that would be very helpful. Thank you.

Good morning, Chris. It's Eric here. So what we've been able to do, just to recap this year is we've been able to renegotiate contracts that have opportunities for reopener or with customers who are seeking additional line commitments in the out years. In order to entertain those discussions, we've been able to ask for higher prices on legacy contracts. We don't have any contracts that are expiring anytime soon. Most of our book of business is committed; we're very tight in the next year or two as we anticipate bringing on new capacity from some of the projects I can't describe. But that doesn't mean we won't have opportunities; there might be still some contracts that shift. The big thing that's happened in the past year has been the movement to have two-thirds under our index reference variable price, whereas before that was fixed. Now our movement is going to be very much driven by market prices and some potential changes on the margins, but few contracts, or potentially, if prices remain where they are, some resets on some of the fixed prices contracts.

Got it. And just a quick follow-up; you’ve also seen OEMs make a very conscientious effort and have been a little bit more decisive in attempting to lock in incremental supply through, let's say, the middle and the balance of the decade. I mean, has that been fully reflected in your negotiations in terms of just what you're willing to commit to them? How should we think about that from a broader market perspective versus some of your peers? Thank you.

We're working with our customers. And we're being very aggressive about adding capacity. I think you see that in our investment plans, and they're coming through now. We believe we're able to execute better from a conversion standpoint. We're good on resources for a number of years. But we still need to add that. We're having conversations with those customers, and we're committed to building capacity to serve the customer base over the long term.

Yes, I think what's also unique, Chris, just to add, is that we are speaking with OEMs and battery companies on three different continents. We are looking towards Europe, and our established presence is well now in Asia. Where we've announced next, we're heading is North America. We've got the resource bases to support that perfectly.

Thank you. Good morning. Question for Eric. Eric, just on your slide 9, can you talk about the difference of pricing between the index reference contracts and the spot pricing in Q2? Another compare versus Q1.

I'm sorry, David, just to confirm my understanding of your question. You're asking about the comparison of prices now versus those in Q2. Sorry to ask.

The price difference between index referencing stock prices in Q2 versus a differential in Q1?

I'm sorry, we don't provide enough detail on that. However, I can mention that spot prices, which you can see by checking the indices, vary but are currently in the low 60s. In China, some contracts are even higher, reaching $70. Our index pricing hasn't reached that level yet, which is part of the reason our guidance and prices remain as they are; we might continue to see an increase in our variable-based contracts.

Understood. And just on the southeast project, can you give any cost or timing indications for their project?

David, we have not given out any costs yet, since it's really pre-feasibility. So timing-wise, it's going to be later in the decade when that would come online; clearly, it needs to have a feedstock, and that's probably the long pole in the tent.

Yes, hey, guys, this is James Cannon on for Josh. Just wondering why it seems like the sale dropped through the EBITDA this earnings upgrade is much higher than the last updates to the year. Can you give any color as to why that is? And similarly on SCF? Has anything in the underlying business change to improve that?

Yes, James, I think that the big difference is this upgrade has been purely driven by price. You're seeing that drop through. And we're not seeing the same impact from spodumene, which was a drag. So the spodumene price increases was a drag on our earnings in the last guidance. As you look at free cash flow, we continue to see improvements. They're driven by the growth in EBITDA, and because of some of the tolling efforts that we're doing, we're actually absorbing some of the inventory that we didn't have before. We're seeing a better working capital profile as a result.

Thanks so much. Can you just talk a little bit about the ramp-up in Kemerton and any surprises you're seeing at this point, any concerns around labor or any equipment that you're concerned about here as we start moving forward?

We made our first product last month and are now beginning to scale up production. The important aspect is that achieving our production means we have confidence in our process chemistry, and there are no unexpected issues with the core process. This marks a significant milestone as it is the first major hurdle we have overcome. Our focus now is on operating at scale and ensuring the purity levels meet our specifications. As we run the new plant, we consistently observe that the standards for battery-grade material are indeed very high. It requires time and volume to reach those standards. We are optimistic about our process chemistry and are confident that the plant will operate effectively; we just need some time to scale up and achieve the necessary purities, after which we will go through the qualification process with our customers.

Thanks so much. And then on the North America potential expansion, can you just talk about philosophically how you're thinking about contracting that out? Is that something where you would think about taking in prepayments to lock in volumes of customers? How far down the road are you in terms of the thought process and discussions on off-take for that facility?

Well, we're having discussions with people, but I'd say we're not very far down there. We're not locked anything in, and we have some ideas around some unique models. We're having conversations with people about that.

Thank you, and good morning, everyone. Kent, I think when you discuss the mega project, you indicated an ability to take recycled feedstock. I just was curious. One, just for that mega project, how much of a contributor you thought that would be? And whether your customers are indicating that obviously, maybe more in the out years, and anytime soon, they would like to have some percentage of recycled feedstock in the mix of lithium that they procure?

Yes, so, I mean, it's a big part of the conversation. It's about recycling, creating a recycle loop through the system. It is years out, but we have to design it in. We think we can build it in phases, but ultimately, we will operate a recycled facility. That will be lower volumes at that time, but we will have time to ramp that up and learn how to optimize that. We are trying to think ahead and design that into a facility so we get scale with the other operating facilities and have the benefit of having an operating plant next door.

Hi, good morning. This is Cory on for Kevin. Going back to slide 9 with the contract breakdown in lithium, I am curious versus last quarter, you have more index referenced variable price contracts, right? 65% versus 50%. And the fixed contract pieces down to 20% from 30% of your battery-grade revenues. Do you have a number in mind for how low you can go on fixed contracts? Are you trying to get to all index reference price contracts?

Yes, we've talked about this for a while. We’re not sure where this ends up; it is a little bit about how our customers want to contract and the direction we’re trying to go. What you're seeing in that is just how the math is evolving. We've upgraded; we’ve changed contracts from those fixed. But remember, the fixed prices adjust over time, so they are not really fixed. We're trying to shorten that period that we adjust as they adjust. I don't really want to call the mix; it's been hard to say where it goes. We're not necessarily absolutely driving it to a variable price, but we like that model where it's index referenced and variable. I think our customers are getting comfortable with it as well. Yes, we've been discussing this for some time and have mentioned that we're uncertain about the outcome. It largely depends on how our customers prefer to contract and the direction we want to pursue. What you're observing is how the math is evolving. We have made upgrades and altered contracts from fixed terms. However, keep in mind that fixed prices change over time, so they aren't truly fixed.

The other moving piece as you look at that chart between different presentations is, of course, where the market indices are. That can drive some mix shifts in those percentages as you go forward.

Got it. And then I guess to stick with that slide similar question in terms of change quarter-over-quarter, last quarter you mentioned product offering; this quarter you mentioned the partnership offering in the context of one of your competitors receiving a large upfront payment for future capacity. Have you approached anybody about similar upfront payments for future lithium capacity? Or maybe you could talk philosophically about how you want to contract future volumes? Thanks.

We've migrated our philosophy around pricing contracts over time. We talked about that quite a bit. Not that is coming to fruition; there are unique models we've been having. We've had discussions for years with people about prepayments and investments and things like that. We've not done that yet. We're not opposed to it; that has to fit in our philosophy and it has to work for us. It's probably more relevant a few years ago when we needed more cash for our investments. It's less important for us today, but we're still open for those investments, but we consider them strategic as part of a relationship and not just because we need the cash.

Thank you and good morning, everyone. As you resign these lithium contracts, what's your philosophy towards the floor and the ceiling in those contracts? Are you widening that range? Are you narrowing it? Is it kind of staying the same versus what you held in general last year?

Yes, well, I would. I mean, it's a philosophy, but they are widening and going up. They are definitely not narrowing.

I guess that I should assume that the floor is also moving up. Is it fair?

Absolutely. And as a follow-up question on Wodgina, is the restart contributing in any meaningful way to your second half results this year? Or is it mostly a 2023 and thereafter story? There'll probably be some volume coming through Wodgina in the second half, but it's not, I don't think it is material. So that'll start impacting in ‘23.

Hi, thanks, good morning. On slide 10, you gave your volume guidance, again per year. So you're going to something like 180,000 tons or something else I’ll see in ‘23? Could you maybe risk-adjust that? How much of that incremental for next year is in the bag? How much maybe have to work for a bit harder, and kind of get the ranges of how you get up to that number?

If I understand your question about volume correctly, we are currently ramping up production at La Negra and Kemerton, along with some tolling volume. We will also be producing tolling from Wodgina and increasing output at the Talison facilities. This is largely under our control. There is some risk associated with each aspect, but we don't need to take extraordinary measures to achieve these goals. Our plants, which we have built and started up, need to operate and produce volume. We will continue to increase production at La Negra, and we expect to have some toll volume along with some products from Wodgina before we can build up conversion. The tolls we are utilizing are ones we have used before, so while there is some risk with this new product form, it is not significant.

The other component is just the Qinzhou acquisition. So we start to close that. It's progressing well, but again, there's potential risks, but that just doesn't close.

Okay, then my second question would be the DoE seems to be throwing around a lot of money to battery metals to a lot of smaller companies these days, grants and loans, things like that. You could probably qualify for a bunch of this money. It's not a massive amount of money from where you guys sit, but it's probably a nice little kicker. Can you talk about that?

Yes, I mean, look, it's money that's available strategically. We're working on that. Nothing that we can announce today, but we're working on it.

Hello. Hi, this is Sean on for Steve. Just in terms of returning back to Wodgina and Kemerton production. Can you just please walk through how the volumes are falling into there then also in terms of Greenbushes, and how the cost of goods sold and the cost are monitoring throughout the year.

We are currently operating Wodgina and ramping up production. Eventually, we will toll that volume until we have the necessary processing plants ready. For Kemerton, it's a matter of ramping up as we historically plan to give each plant two years to reach full capacity, although we hope to achieve that faster. In relation to Talison, we are expanding; CGP2 is in operation and we have started construction on CGP3. We are currently commissioning CGP2 and ramping up its production while breaking ground on CGP3.

Thank you. Thanks for all for taking my questions today. Kent, I just wanted to follow up on the conversation around the mega flex site. I believe the target was 100,000 tons per annum of conversion capacity. I just wanted to confirm whether you all felt that Kings Mountain and recycled feedstock would be enough to feed up to that capacity as a resource eventually worth it. It sounded like earlier, perhaps Eric was discussing another need for another asset to support that.

Yes, we're thinking, and again, it's pre-feasibility. We're trying to ensure we understand exactly the resource at Kings Mountain. We're doing more work on that. But we think we could feed that mega flex facility with Kings Mountain plus recycled material to get to the scale that you referenced: 100,000 tons a year.

Okay. And then I just want to follow up earlier on some of the conversations around upside volumes. It looks like in the current chart that you all sort of are still assuming this 10,000 to 20,000 tons per annum of toll volumes, which is, I guess, basically the levels that you're at in 2022. And how significant or how much available capacity is out there that you could theoretically toll into? Because I guess there's also the strategy of selling spodumene into the market, which seems like a pivot from previous views that you all had; but just wondering volumetrically how much capacity upside do you think that there is in the market?

Eric can discuss the tolling regarding spodumene. We are adopting a more flexible approach, which is a temporary strategy that differs from our long-term goal of selling spodumene. Our aim is to convert and sell to our end customers the lithium salts they need. As we ramp up our plants, there will be challenges balancing conversion and mining processes. To address this, we have opted to allocate resources to the mines first, as they typically have longer lead times. We will ensure the mines are operational, and if we have resources available before our conversion capacity is ready, we will either toll the material or sell spodumene instead of letting it go unused.

There is no deviation from the strategy, no. Thank you. Yes, there's no deviation from the strategy; to answer your question about the availability of tolling volume, there's still a healthy market of conversion capacity being built or operating in China without access to spodumene to source against that. It varies by year. A lot of these projects can be opaque. It's a big market, but it can be sometimes 60% to 70% utilized. That implies that there's capacity out there. In fact, we know this; we are tolling now that's available or coming on that we can take advantage of. But that is a bridging strategy to our own conversion assets, and one would you prefer to do as opposed to selling spodumene directly into the market.

Great. Thanks for taking my question. Yes, so I guess I just wanted to ask a more high-level question. You noted that obviously your contracts have your results or guidance has some upside if market prices stay where they are, but also some downside if we do receive from these present levels. So what would it take for the market to kind of go back to prior levels? Is there been any demand destruction or changes to the adoption curves that you've been observing, especially as the cost of lithium rises in the battery and the vehicle?

Right, we're not going to call the long-term price, because we don't know that. We think it will move up and down; it's not going to just sit where it is forever. We see the market being tight on lithium for a pretty long period. There might be periods of oversupply, and we see that several years out, but that will disappear quickly. Prices are going to move; they're going to move around. We can't call it. We do know that the cost to produce to get to the volumes the market needs goes up quite a bit from what we see the cost curve today. Out over time, could it move into the 20s and 30s? It absolutely could. But we still see the market being tight for a pretty long time.

You had another question about costs in the vehicle and technology. As you know, lithium is a small part of the cost of the battery. It is seen as significant; as you pointed out, the escalation of its costs over the past year. The other phenomenon that's important to note is the technology phenomenon around innovation and driving out. Longer-range, energy density and penetration don't come from lower cost raw materials; they come from innovation and energy density and more dense materials. That's the movement towards higher nickel, which is one of the changes in demand for the underlying technology.

So good morning. How much could you flex the tolling side of the business? I know the margins are significantly different from your segment average. With regard to recycling, is there any incentive to shift your center of gravity downstream into more of the processing chemicals or ways to integrate your knowledge of the chemistry with downstream processing and capture more margin that way?

So, first of all, Laurence, on the tolling, I would say we're evaluating that now. There’s, as per the earlier question, there’s capacity in the marketplace, and we will have spodumene coming from MRL, the MARBL joint venture, and our partner with MRL that we can put into the market. So it could flex upwards from the guidance that we have here; that is possible. Our margins are slightly less because you're paying several dollars a kilogram, so you see over what our normal costs would be. But obviously, at current pricing, that's fairly immaterial in the scheme of things. So in terms of recycling, I think we're looking at this now. We believe, if you look at what it takes to process black mass to various mineral components, many of the unit operations, in fact, we more than believe we know that many of the unit operations are similar to what we do throughout our company and certainly in lithium. Many of the technologies are practiced in our existing operations to process mineral resources we do. Other than just that last step processing to battery-grade lithium, we're evaluating just how we partner, invest, and develop that supply chain, which will be a regional effort from region to region, as it's a very regionalized business recycling is. We’re in that, and as we develop that strategy further, we will share more details of that in the future.

Thank you, Nadia. And thank you all for your participation in our call today. The momentum we are experiencing in ‘22, combined with our pipeline of projects, strongly positions us to execute on profitable and sustainable growth for the longer term. I'm confident in our team's ability to drive value for all stakeholders by accelerating our growth in a sustainable way and to lead by example. Thank you for joining us.