Please ensure Javascript is enabled for purposes of website accessibility

Livent Corp. (LTHM) Q1 2020 Earnings Call Transcript

By Motley Fool Transcribers - May 11, 2020 at 11:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

LTHM earnings call for the period ending March 31, 2020.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Livent Corp. (LTHM -2.29%)
Q1 2020 Earnings Call
May 11, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the First Quarter 2020 Earnings Release Conference Call for the Livent Corporation. [Operator Instructions]

I will now turn the conference over to Mr. Daniel Rosen, Manager, Investor Relations for Livent Corporation. Mr. Rosen, you may begin.

Daniel Rosen -- Manager Investor Relations

Thank you, Tina. Good evening, everyone, and welcome to Livent's First Quarter 2020 Earnings Call. Joining me today are Paul Graves, President and Chief Executive Officer; and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. The prepared remarks from today's discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. We would ask that any questions be limited to two per caller. We will be happy to address any additional questions after the call.

Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will include references to various non-GAAP financial metrics. Definitions of these terms as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor Relations website.

And with that, I'll turn the call over to Paul.

Paul Graves -- President and Chief Executive Officer

Thank you, Dan, and good evening, everyone. There are a few key topics we want to address today. All of which will be discussed in the context of the novel coronavirus pandemic and its current and potential future impact on Livent. Before doing so, I would like to give a special thanks to all of our Livent employees around the world. Their hard work and resilience have allowed us to maintain a safe and healthy working environment, while continuing to operate and serve our customers. We have asked a lot of them and truly appreciate their focus and commitment during these challenging times to resolve.

To begin, we're pleased to state that all of our production facilities around the world are fully operational. Apart from a two week stoppage in Argentina due to a mandatory national quarantine and an extended lunar year break in China at the beginning of the COVID-19 outbreak. All of our sites have continued to operate, albeit with additional health and safety protocols. Our ability to operate through the pandemic has been a testament to the strong and dedicated teams we have in place around the world. Second, as the coronavirus began to spread outside of China, it became clear to us that the potential impact on our business as well as the broader market would require us to take a more disciplined approach to cash flow management and liquidity.

In March, we made the decision to suspend all capital expansion work globally. This action allows us to cut our forecasted capital spending in 2020 by half to approximately $115 million. While we remain fully committed to our long-term capacity expansion plans, temporarily suspending all capital projects was the prudent decision to take in the current environment. In addition, we worked closely with our relationship lenders to amend our credit facility and increase our maximum allowed net leverage to six times EBITDA through 2020 versus 3.5 times previously. We believe this amendment to our revolver will provide ample liquidity through the challenging near-term environment.

Gilberto will provide more details in his comments. And third, we will share our latest views on the lithium market. Specifically what the coronavirus pandemic has done so far, what we expect the impact to be in 2020 and potential longer-term implications. Starting on slide three of our prepared slides. Given Livent's presence in China and Asia more broadly, we've been addressing the coronavirus outbreak since early February when we formed a regional pandemic response team and implemented various actions to keep our employees safe. By taking decisive early steps and diligently monitoring the situation, we were able to safely resume operations in China following the extended Lunar New Year holiday.

This early start also meant we could react quickly and confidently at outside of China once it became clear that we needed to do so. We maintain the same safety protocols today and have been able to run without any major issues in China since then. Even during the period when there were significant logistical challenges in moving people and products across provincial borders in China, we were able to leverage our global supply chain to minimize disruption in delivering products to customers. Informed by our experience in Asia, Livent was able to quickly form a global pandemic response team in early March, when the worldwide spread and severity of the virus became clear.

Since then, we continue to prioritize the safety and wellbeing of our employees, customers and communities around the world. We also took actions to safely keep all of our manufacturing sites running. Many of the lithium products we make are essential, not only in energy storage, but in critical applications that the world needs now more than ever from pharmaceutical ingredients and industrial disinfectants to components used in vital medical equipment. To ensure that we could continue operations without compromising on health and safety, we worked closely with local and national authorities and our employees to develop and institute strict procedures on a site-by-site basis.

These include visitor and medical screenings, essential person designations, split shifts and social distancing measures. Our collaboration with the provincial and federal officials in Argentina during the mandatory countrywide quarantine reflects Livent's level of preparedness and commitment to responsible operations. We work closely with the Argentine government to develop and administer a safe and practical set of protocols to resume local operations after on two weeks of downtime. Since then, we've been operating at the salar and our processing facilities without incident.

We've also used this pandemic as an opportunity to further engage with and support our local communities. From donating personal protective equipment in the U.K. to providing support for medical personnel and ambulance services and essential air transportation in Argentina, we are grateful to be in a position to help those in our communities. Now on to the current impact of COVID-19 on the lithium industry. I will attempt not to speculate too much, but we'll instead focus on what we are actually seeing today. First, there is reduced visibility in our ability to forecast near-term lithium demand.

And by this, I mean the remainder of 2020. And a large part of this can be attributed to the broad disruption to the auto market and the implications of prolonged OEM plant shutdowns. World passenger vehicle sales declined by 24% in the first quarter. And while electric vehicle penetration rates have been notably higher, and total volumes were negatively impacted. The timing, duration and overall impact of the coronavirus has also varied greatly by region. For example, in the final week of April, Chinese retail hotel sales improved to roughly flat year-over-year after being down as much as 40% early in March.

Further, China's new energy vehicle sales served just over 300% month-over-month to 53,000 units in March, despite being down roughly 55% year-to-date versus last year. Meanwhile, many OEM plants in Europe and the U.S. remained shutdown due to government restrictions, with the second quarter expected to be the most impacted. Just as important, the average consumer is clearly not spending at anything like pre-Covid levels, and this is especially true for larger items such as autos.

It is difficult to predict how quickly consumer spending will rebound or when management and supply chains will return to prior levels of activity. While we remain in close contact with customers regarding volume needs for the remainder of this year, it is still unclear whether some demand will be recovered in the second half of 2020, all pushed out further. This is amplified in an environment where there is understandably more focused on managing working capital than building inventory at our customers. Delays in restarting manufacturing plants may result in upcoming electric vehicle launches being delayed by several months. However, from a fundamental standpoint, we have not seen any evidence of OEMs pulling back from their electrification objectives or substantially altering their lineup of the EVs for launch.

In fact, we've seen certain OEMs use this as an opportunity to engage more directly on key aspects of their electric vehicle supply chain from taking a greater interest in the location of sourcing and manufacturing sites to setting more stringent standards for quality and sustainability. With a heightened focus on managing capital and R&D spend, we are seeing OEM development efforts go toward platforms that will be attractive and sustainable over a long period of time. Put another way, we see OEMs allocating their own scarce resources toward future EV platforms rather than historical ICE technologies or projects with uncertain commercial models, such as autonomous driving.

Moving to the lithium market, we entered this year in a general state of oversupply, albeit with a wide range of quality capabilities on the supply side. The near-term slowdown in demand, driven by the coronavirus, put additional downward pressure on pricing. This was particularly evident in shorter-term uncontracted markets such as China, which was fed by a continued oversupply of spodumene concentrate, especially that shift in prior quarters, which has been sitting in China waiting to be processed. There was also a little urgency from customers to take their share of annual volume commitments in the first quarter or enter into new agreements, given the broader market uncertainty. We expect this dynamic to continue through the middle of this year as customers resume production and work to assess the impact on their own near to medium-term end market demand.

Last quarter, we discussed industrywide postponed or canceled lithium capacity expansion projects as well as announced output reductions as a result of weaker pricing. This trend continues with sustained lithium pricing pressure and near-term demand weakness due to the coronavirus. Production declines to date have still been relatively modest, reflecting the incentive for many higher cost producers to continue covering their cash costs in the hopes of remaining in operation until the market improves. However, we believe this is not feasible over an extended period, and we expect to see further reductions in production in the coming months.

Additionally, there have been challenges for lithium products already in development. With coronavirus-related supply chain and government restrictions, further delaying the time expected to bring them into production. More importantly, though, the growing number of canceled or postponed expansion projects will have broader implications for the industry as we move beyond 2020. These announcements have come from all geography and resource types as well as new and established industry players. In aggregate, we have seen over 400,000 tons worth of expansion delays or cancellations in both lithium carbonate and hydroxide over the last few quarters.

Current lithium prices have severely challenged any reasonable investment return hurdles and several notable distressed lithium assets have illustrated the limited and nonexisting financing options in today's market. While near-term lithium demand forecasts have significantly widened due to the current uncertainty in the market, positioning from governments and global OEMs continues to support demand levels in 2022 and beyond that have not materially changed from prior expectations. So as demand picks up as the global business environment normalizes, and electric vehicle production accelerates. We believe there will be a much more rapid tightening of the supply demand balance than we would have predicted just a few months ago.

I will now turn the call over to Gilberto.

Gilberto Antoniazzi -- Chief Financial Officer

Thank you, Paul, and good evening, everyone. Turning now to Livent's first quarter performance. For the first quarter of 2020, we reported revenue of $69 million. Adjusted EBITDA of $9 million and adjusted earnings per share of $0.02. Our results reflected a challenging operating environment for both Livent and the lithium industry as a whole. The decline in revenue was driven by lower sold volumes, most notably in China and lower average pricing. There were some deferred purchases from customers as they work to limit inventory buildup while assessing the impact of the crisis on their end market demand.

Margins were impacted by lower pricing and hydroxide sales using third-party purchase lithium carbonate. We expect the margin impact from hydroxide sales using third-party purchase carbonate to be notably higher in the first half of this year as we work through the roughly 4,000 metric tons of hydroxide inventory carry forward from 2019. Moving now to Livent's liquidity position. As Paul mentioned earlier, when the coronavirus began to spread outside of China, Livent recognized the inherent uncertainty impacting the global economy and the need for an increased focus on liquidity and cash flow management.

Our first public action was in March, when we announced the suspension of all capital expansion work globally. We cut projected capital spending for 2020 in half to approximately $150 million. Reflected the decision to pause expansion work in both Argentina and best in North Carolina. Quarterly spending for the rest of the year will come down significantly from the first quarter. The decision to halt expansion was not made until well into the first quarter. And since then, we have been focused on stopping key project items at strategic points that will allow us to resume work as quickly and cost effectively as possible.

We remain confident in continuing to fulfill orders from our customers in the interim and remain committed to our long-term capacity expansion goals. While we cannot currently provide a specific date for when we intend to resume expansion work, it's unlikely it will be before the industry returns to more normalized conditions. Moving to slide eight. With respect to our balance sheet. We work closely with our relationship with lenders to amend Livent's existing facility to provide sufficient liquidity to support operations during this time of uncertainty. We have increased the net leverage covenant limit on our revolver, allowing for up to six times EBITDA through 2020 versus 3.5 times previously.

This higher leverage limit provides a safeguard against COVID-19 strategy scenarios that we have evaluated. We will also remain focused on reducing spending in all nonessential areas while diligently managing working capital. Looking beyond 2020, we continue to work with our lenders to evaluate alternative debt structures beyond our existing $400 million revolver mature in 2023, and that better supports Livent's long-term capital requirements. To conclude my remarks, I want to address the topic of guidance. In light of the evolving impact of coronavirus pandemic and the broader uncertainty in the global economy, Livent with its previous issue full year 2020 guidance in early April.

Following the two weeks of stoppage in Argentina, we now expect lithium carbonate production volumes to be flat in 2020 year-over-year. We plan to sell all 4,000 tons of hydroxide inventory that we carry into 2020, and we run our hydroxide operations this year with the intention of meeting all customer demand. While minimizing third-party carbonate purchases. We will not look to build any inventory in speculation of a rebounding demand. We intend to provide an updated financial outlook once we have a greater visibility.

With that, I'll turn the call back to Paul.

Paul Graves -- President and Chief Executive Officer

Thank you, Gilberto. I want to conclude by looking beyond the near-term challenges to focus on some of the longer-term themes that continue to hold true in our industry. While there is uncertainty around near-term lithium demand and the implications of a coronavirus-led downturn on electric vehicle sales, there's no indication that the longer-term push to electrification has meaningfully changed. We do not believe the key fundamentals that are driving the shift to electric vehicles have changed. These fundamental drivers to strong regulatory support around the world, for a cleaner air and to fight climate change as well as advancements in battery technology and increased manufacturing scale that will bring EVs toward cost parity with internal combustion engine vehicles.

In another display of commitment to the industry, the Chinese government recently announced that new energy vehicles bought in 2021 or 2022 will be exempt from federal purchase taxes. The government also extended the NEV subsidy program through 2022 from its previous 2020 expiration, although it is stepping down subsidies over that time frame. And in Europe, despite auto sales being down significantly year-to-date, EV penetration rates are at all-time highs as we move closer to CO2 emission compliance dates. The shift to increased use of lithium hydroxide also continues in both the cathodes of electric vehicles and energy storage more broadly.

With respect to high nickel cathode technologies, which require lithium hydroxide, there has been an increased focus on chemistries beyond NTM 811. Additional developments and success have come from the use of NCA, NCMA and other blends incorporating higher nickel comment. There have been recent announcements of several new electric vehicle models in China using LFP-based cathodes. However, higher use of this legacy cathode, which can use carbonate or hydroxide, is in no way contradictory to the trend of higher hydroxide demand.

We have always stated that not all energy storage applications will have performance specifications requiring high nickel cathodes. This can include shorter range in commercial vehicles, mobile devices or stationary storage applications to name a few. As battery technology continues to improve, and premier global OEMs roll out larger electric vehicle platforms, we still project that hydroxide demand will grow at a higher year-on-year rate than carbonate and make up an increasing share of the energy storage market. With that said, we continue to operate and plan under the assumption that both products will be of critical importance for long-term energy storage solutions.

Finally, given the significant reduction in announced development and expansion plans, there is greater uncertainty over where the supply of lithium to meet future demand will come from over the medium to long term. Our near-term demand uncertainties, the current issue that most industry players are focused on, the debate will ultimately drawn back to supply. And this period of depressed lithium pricing over the last few quarters has made clear that challenges that the current industrywide business model is creating for the future of our industry.

As auto OEMs have become more directly involved in the electric vehicle supply chain, there has been a heightened focus on ensuring that not only our supply partners fully integrated between lithium chemicals and resource, but there is a path to increasing capacity to meet higher qualified demand needs over time. However, current average market prices, and by that, I mean the blended prices across all geographies, not just the unsustainable low prices we see in the China market, there are little to no lithium development projects out there that can be considered economically viable when looking for a reasonable return on invested capital.

In fact, at these prices, the majority of lithium products do not even cover their cost of capital. In order to ensure that lithium supply continues to grow and keep up with accelerating future demand, there must be greater predictability in pricing or firmer long-term commitments from customers before our industry can start to invest for growth again. In addition, OEMs have placed greater importance on where their lithium is being produced for a number of reasons. The disruption to global supply chains from the spread of the coronavirus has reinforced the importance of not being reliant on a single region to meet supplier needs and the benefits of localizing parts of production.

China and greater Asia represent a significant portion of the energy storage supply chain today. So the impact on the lithium industry has been more visible from the onset of the pandemic. Livent's ability to serve customers with lithium products from a global manufacturing network with hydroxide from both the U.S. and China, as well as the security of supply that comes from our ability to use third-party material in our hydroxide production has been particularly valuable to our customers. And while most recent lithium compound production capacity has been built in China due to lower capital costs, the importance of alternate EV supply chains that do not learn through China is growing.

The localization element of OEM focus is also rooted in sustainability objectives, and we expect this to be magnified as EV models are rolled out on a larger scale. And especially as the number of electric vehicles sold in Europe increases. And with carbon conscious principles, in part behind the transition to electric vehicles, we believe there will be a bigger push to reduce the carbon intense practice of shipping unfinished raw materials or intermediate products to multiple locations around the world. Livent has been sharply focused on its own global footprint as a stand-alone company since the time of its IPO.

As part of these efforts, we will be launching our revised sustainability program as well as outlining our broader ESG framework as part of a series of releases to be provided throughout this year. In closing, as Livent looks beyond current market conditions, we believe that our core advantages, the low-cost and sustainable nature of our ground-based operations, our partnerships with leading battery producers and automotive OEMs and our continued investment in developing next-generation engineered lithium products, position us to be a prime beneficiary of the return to improved lithium market dynamics.

I will now turn the call back to Dan for questions.

Daniel Rosen -- Manager Investor Relations

Thank you, Paul. Tina, you may now begin the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] And your first question is from Bob Koort with Goldman Sachs. Please go ahead.

Don Campbell -- Goldman Sachs -- Analyst

Good morning. This is Don Campbell on for Bob. Last week, one of your competitors noted that second quarter as battery manufacturers catch up on backlog orders. There would be somewhat insulated and most of the impact from the shutdown of OEMs would hit the second half of 2020. Are you seeing something similar?

Paul Graves -- President and Chief Executive Officer

Look, it's a complicated question because it's not an industry where all the dynamics are the same among all customers. There has certainly been an issue in our industry of a shortness of finished materials in the supply chain. I mean, we've seen many conversations about not enough battery cells being available. But it's not as simple as just simply using this downtime to build more capability. We've seen certainly battery factories close down because of the coronavirus in the U.S. In large parts of Asia at times as well. And that certainly had an impact.

We have also seen some tension between the ultimate consumer, the OEM who is buying these products, who start to look at their own cash flows, not being particularly willing to fund a buildup of inventory back through the supply chain. So while yes, we have seen that trend at work, we've certainly seen battery producers take the opportunity to build some inventory. I'm not sure that it's a particularly sustainable practice that will continue for much really more than a couple of months in the current environment.

Don Campbell -- Goldman Sachs -- Analyst

Got it. Could you just talk a little bit about the options regarding your evaluation of alternative debt structures? And then, I guess, is there a pathway for some type of agreement was something of a downstream player?

Paul Graves -- President and Chief Executive Officer

Let me talk about the debt piece first. We're at the very early stage of this, but it's clear using a revolver where covenant restrictions that really wasn't designed for long-term capital projects. But frankly, it was never designed to be the permanent capital structure that we wanted to put in place. And I think what we're seeing now is, look, they're just going to have to accelerate the process of putting in a debt structure that makes more sense for a business with the capital and financial profile of ours. We'll focus much more on longer duration and greater certainty around that less liquidity challenges to what we do from the debt profile. And the second part of your question, maybe you could just clarify what you're asking me there?

Don Campbell -- Goldman Sachs -- Analyst

Yes. I mean, I guess, is there any type of pathway for repurchase a lithium product or some type of agreement with downstream EV or battery producer, given kind of the emphasis of securing supply for the future that you were referencing?

Paul Graves -- President and Chief Executive Officer

Yes. Look, it's an interesting question. The challenge you have with that is if you're a downstream consumer, downstream producer, you have some pretty significant significant calls on your capital yourself, right, whether that's to expand, whether that's to fund new technologies, whether it's to build new battery plants. And so while you can certainly look around and see the logic to that, and we can look at some very large consumers of lithium. It's also sometimes a little difficult to understand whether the right thing for them is to deploy capital in this way in order to take the price of the lithium down. Or is it better to, frankly, just allow the lithium industry to finance itself by offering greater price certainty and more investable economics at those prices.

And I think that Joe is still out on that. I think while ever we keep having these demand disruptions everything like COVID-19 are going on. And while ever our industry is overbuilding on the supply side, it's a conversation that can be pushed further down the street. At some point, there's going to have to be a reckoning for anybody who wants growth in the lithium industry, you either going to have to provide capital to an industry such as ours. So you're going to have to provide prices that are high enough to enable us to go out and get third-party financing. And I think I'm not sure we're in a place yet where either of those is quite ready to happen. But one of them will, for sure.\

Operator

Thank you. Our next question comes from Chris Kapsch with Loop Capital Markets. Please go ahead.

Gilberto Antoniazzi -- Chief Financial Officer

Do we move on to the next question.

Operator

Your next question is from Chris Parkinson with Credit Suisse.

Paul Graves -- President and Chief Executive Officer

Are we having some technical challenges on your side? Or is this just lines of the question I ask us that we have a problem with.

Operator

I believe we may be having a technical issue, one moment. Okay. Chris Kapsch, can you to speak, your phone is open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yes. It's Chris Kapsch.

Paul Graves -- President and Chief Executive Officer

Chris, we can hear you now. Great.

Chris Kapsch -- Loop Capital Markets -- Analyst

Sorry about that. I don't know what's going on. So I don't I was blanked out for like 15 minutes. So apologies if somebody's addressed this already. But so one of your larger integrated lithium competitors characterize the the industry demand curve as having pushed to the right. You mentioned like you see the fundamental drivers as very much in place. So maybe we're just talking about semantics here, then maybe focus a little bit just more on near-term disruption. Would you concur that, like at least near term, that the demand curve has pushed to the right? Or do you feel based on your insights with your relationships that it's business as usual?

Paul Graves -- President and Chief Executive Officer

I would never disagree with such a large in eminent competitor of mine on such matters. I think there's the shape of the curve is different today for sure. I don't know whether it's pushed out a year, eight months, 16 months. I just don't have enough data to point that. I've characterized 2020, sometimes I've heard it characterized by others, and I think it's a valid one as will 2020 turn out to be a bit of a lost year. And it will kind of skip the year of growth in 2020. I think that's an absolutely plausible scenario, although, again, it's just too early to really see because it's hard to know because the back end of this year is going to largely be driven by how people feel about the first half of 2021 and maybe even the second half of 2021.

What we have heard, though, is, generally speaking, a quite vocal commitment to '22, '23 and beyond volume commitments by some of our customers. So while they're saying, look, we may be a little delayed in taking material, you should not assume that we will want any less material by the time we're into 2022 because I think most of them think that they are just going to be under just as much pressure to launch these EVs. It's an interesting dynamic that when they are capital constrained, they look down all of their own projects and say, where do we deploy this capital.

And it becomes increasingly clear to us that they're saying, electrification has to happen for whatever reason and us changing our spending or reinvesting in internal combustion engines or putting a lot of capital toward maybe less revenue generators like autonomous driving and maybe aren't the right things to do right now, and we should be doubling down on where the future inevitable lies, which is electric vehicles. And I think that's what probably while they're looking at their near-term patents. Obviously, the plants are closed in many cases. I think they're starting to realize that it probably accelerates their portfolio transition even more rapidly toward a predominantly electric fleet.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. And then the curtailment of your the halting or suspension of your capex expansion, how do you feel about fulfilling those demand requirements, which you just mentioned, albeit more pushed out maybe a little bit in terms of the ramping of their demand, assuming it happens, generally to the magnitude that you're referencing in sort of 2022 time frame?

Paul Graves -- President and Chief Executive Officer

Yes. It's maybe the single largest question we asked us, I'm going to put the capital piece and the ability to finance piece to one side one moment. But from a pure construction and engineering perspective, there's two elements to what we've been trying to do. Build a more carbonate, build a more carbonate in Argentina and then line up the hydroxide expansions with that, either at the same level or maybe a little bit behind to go a little bit longer carbonate. I think one thing that we're looking very closely at right now is, while Phase one in Argentina clearly is now delayed. Are there opportunities for us to combine Phases one and 2, so that we still get instead of 9,000 tons and then a year is too late, another 9,000, 10,000 tons, we try and bring it all on at once.

And so that we have a bigger step-up in a single go than trying to do it in smaller increments. And we're taking a long hard look at the practicality of that. It's difficult today, frankly, because we're doing this in Argentina. Argentina is enlarging in a complete lockdown. There's no movement between provinces. It's difficult to move people around. You certainly can't fly in and meet people. So we have to sort of get through this short-term restriction on our activities so that we can start to ramp up. And then we can start to answer the question now what does the shape of the expansion look like? We will certainly expand and our plans haven't changed. But again, just like the demand curve, it's quite likely to take on a different shape.

Operator

And our next question is from Chris Parkinson with Credit Suisse.

Chris Parkinson -- Credit Suisse -- Analyst

Great, thank you. You hit on this a little, but can you say a little bit more about just kind of the net effect on the cost curve, just given the magnitude of the expansion deferrals, which honestly, it's been going on for quite some time now, basically almost a year. So you've seen a lot of things you kind of keep it down to the right and if you could hit on that in the context of both carbonate and hydroxide and just how you believe regard your beliefs in product quality should also play in your estimates. Just where do you see the current cost curve? Forget 2020 but for kind of 2021, '22, how has your thought process changed around that?

Paul Graves -- President and Chief Executive Officer

Thanks, Chris. I'm not sure our thoughts on the cost curve have really changed that much if I'm completely honest. I think you really got continue to have in both carbonate and hydroxide, two very different producers. You have a fully integrated producer. And then you have a nonintegrated producer. They're nonintegrated producer today is able to take advantage of some very my view at this very low spodumene prices. When you look at spodumene prices at $400 and $450 a ton, and you look at some of the miners out there with the exception probably greenbushes, nobody can produce both to that level continuously as they move through different parts of their mines.

And so really, the profit pressure have been on the raw material, and there's no reinvestment economics at these prices at the spodumene mine. I personally find it fascinating that in an environment where nonintegrated pushes had its single biggest input cost for by 50% from over $800 to $400 a ton. They've also allowed their profitability to fall at the same time because there's been a desire to bring on conversion capacity in China. But what you find is that's a heavily leveraged play on the spodumene cost and other frictional costs. We've also found, because of the way that they are operating, they find increasingly difficult to meet tightening and tighter quality standards that are being imposed upon them as we move through these next-generation of batteries.

And so we found it become more and more clear as we've been through the last six or nine months that really the usual crew of two or three or maybe four people are actually getting qualified remains the case. There are very few customers that we've seen new entrants come in and successfully qualifying their material, whether that's in carbonate, but especially in hydroxide. The second point that I think people have to understand, I mean, we see lots of comment on a cost curve, but that cost curve is always a marginal cash cost curve that people look to. But if you look through the commentary from various producers or you frankly just sit down and do the math yourself, the breakeven price of production is typically about 50% higher than.

And when I say breakeven, I mean to report operating profit of 0 because by the time you put in depreciation, by the time you brought in the distribution logistics, duty, freight as well as corporate costs that we all bear, you need about 50% higher to breakeven at an operating profit level, which may sound, OK, there's still a low price, you can't finance with 0 operating profit. So that's fine if you're just going to run your assets and do nothing more, not grow, not expand, but now you need to earn more than that to cover your interest expense,etc. So when we look at the curve, we're trying to define a curve that's appropriate for reinvestment, a reinvestment level that's in line with the demand patterns that our customers and independent observers keep telling us we're going to need.

And I think what you find is you've sort of got an all-in cost that the marginal producer needs to hit that is well in the double digits per kilo of either carbonate and especially of hydroxide, and that's, again, assuming they can meet the quality requirements. So it's not so easy as maybe an iron ore or copper, just building a simple cost curve because it's very, very fluid market and have multiple steps in it that can distort it depending on the conditions of any one of those steps.

Chris Parkinson -- Credit Suisse -- Analyst

A very helpful color. Just understanding, obviously, you can't give you guidance, but you did hit a little on your thought process regarding combining the phases of the projects. Just from the top down, just given the current scenario, what would you kind of view as kind of your base case scenario in terms of your expectations for getting back on track? And what would be kind of a disappointing scenario from your perspective, just very broadly, and what that would mean for your own cash flow projections?

Paul Graves -- President and Chief Executive Officer

So Chris, when you say getting back on track back on track, are you talking about with the Argentina expansion? Or...

Chris Parkinson -- Credit Suisse -- Analyst

Correct.

Paul Graves -- President and Chief Executive Officer

Okay. Yes, yes. Well, look, we're a long way through the first phase of expansion in Argentina. And the first thing I would say is we cannot do anything in Argentina. We're not permitted to do any construction. We're not permitted to have people out there working. And so we have not only stocked, but we've actually started the process of demobilization of projects from the salar. So when we do start-up, it's not just going to be flicking a switch. We're going to have to go through the whole process of remobilizing. It's clearly not going to happen in a southern hemisphere winter.

And frankly, until we get greater clarity about 2021 and what I love our profitability in 2021 is going to be going to be hard to convince anybody to extend capital to us on normal commercial terms in order to allow us to start that back up. So I expect that the decision is more likely to be made in the back half of 2020 and early 2021 than it is in the next couple of months. If we can successfully reengineer the product of the project, I would expect that it will still take us more than a year, well more than a year, possibly double that to bring the extra volume online. That will not mean that we're being a lot more on when we do it.

But right now, it's a highly uncertain environment. I think trust me, what would I be disappointed by? I'm disappointed already. I'm disappointed that we're in this place. I'm disappointed that we're not able to continue. Our Argentina operations remain one of the lowest cost producer of lithium products in the world. And it's disappointing to me that we've had so many external factors that have created these problems for us with that expansion.

Operator

Thank you. Our next question is from the line of Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Sir, good evening. Paul, I was wondering if you could run through your portfolio of lithium products and comment on what you're seeing here today with regard to demand for A, hydroxide; B, lithium and C, lithium metal. What are the similarities and differences in the patterns there?

Paul Graves -- President and Chief Executive Officer

Sure. I mean, lithium metal is still a very small business today. It's used in a couple of small applications that are just fundamentally different, right? The most of the high-purity metal that we sell is going into nonrechargeable lithium-ion batteries. And again, it's a small business. The lithium business, I'm sure, is a much more diverse application business. But it is largely a GDP-driven business. It's largely a general industrial business. But it's also a product that, frankly, customers don't hold any inventory off for very good reasons. And so there's not a lot of slack in the system that while ever people continue to produce and when people are producing pharmaceuticals and are producing rubber products for medical devices and other areas.

We've certainly not seen major, major issues or major, major indications that demand is going to be lower this year in the beauty lithium business. We have seen some noise in the automotive tire space, driven by plant closures. But even there, they've really been relatively small. So that's a business that's, frankly, so far, and I stressed so far because it feels to me still very early in 2020, has held up reasonably well. Lithium hydroxides look, I think it's a frankly more complicated business. What we've seen is continued commitment toward many of the battery platforms that we we're talking to our customers around.

But frankly, what I might call a reluctance on the battery producers to pull the trigger and get on with the building process and place the orders for the product because I think they themselves are still waiting for guidance and some leadership on the automotive OEMs about how aggressively they should go with their build-outs. It's certainly not it's not a market today where you look and see a tightening of supply and demand. But again, that's probably as much because there's the demand side feels so distorted right now and, especially because we had such a big drop-off in January, February time with the COVID in Asia. And now we're starting to see it pick up again while the rest of the world slows down. It's very difficult to read the hydroxide energy storage hydroxide market at the moment.

Kevin McCarthy -- Vertical Research Partners -- Analyst

My second question relates to potential for industry consolidation. You've probably seen press reports out of Australia. Indicating that Tianqi made divesture stake If you look out over the next few years, do you think that the industry needs to consolidate? And if you do, what does that path look like? As I look at it, the incumbents aren't exactly swimming in pools of excess capital. Energy companies are constrained. Do you think new entrants will come in and catalyze the process? Or how do you think it will play out?

Paul Graves -- President and Chief Executive Officer

How long we got left on the call? Okay. I try and do that reasonably quickly. Look, I think one thing I would say is when you have a single company that is in financial distress and a big important company in financial distress. If that is as a result of those specific factors related to that, that company, then I can imagine that a stronger competitor comes along. But frankly, I'm not sure that's entirely the case. I think there's some company specific, but also some pretty significant industry headwinds that drives challenges. And look, we all face them right now. We all face them.

I don't think anybody in this industry who is subject to normal commercial pressures feels that they have access to anywhere near enough capital that they need to take advantage of the opportunities in front of them. I don't frankly know that consolidation solves that problem too much you can maybe see an argument that if you have consolidation, and therefore, you take out excess supply as a result, but that's not really the issue in our industry. Could you see a new entrant with very deep pockets coming into this industry? Possibly. I would say that it is a difficult industry to predict. It's a difficult industry to understand.

And I have a lot of sympathy for anybody who wants to go to their board and say, I want to turn up and buy a lithium company. Let me present the financial model to you and talk you through what's been happening in this business over the last five, six, seven years. It's not an easy story to sell. And it's still a very immature early stage business where maybe waiting two or three more years and see how the industry shapes out might be a more effective M&A strategy for a new entrant.

I say all that to say, no, I don't really see a lot of consolidation. I frankly see the opposite more. I think we'll have far fewer new entrants being able to or being willing to take the risk to jump into the market. I think it's just going to be financially almost impossible for anybody regardless of the quality of your resource in the next few years to easily enter into this market.

Kevin McCarthy -- Vertical Research Partners -- Analyst

I appreciate the thoughts.

Paul Graves -- President and Chief Executive Officer

Thanks.

Operator

Our next question is from the line of Mike Harrison with Seaport Global.

Mike Harrison -- Seaport Global -- Analyst

Hi, good evening. I was wondering, I understand the difficulty in forecasting the pace of electric vehicle demand or OEM demand from here or macro recovery, and obviously, the consumer situation, all very difficult to figure out. But I was wondering if you can shed a little bit more light on what you're seeing in terms of inventory levels and maybe dig on that inventory question a little bit more. Really just trying to get a sense of how a destock or restock cycle could play out? And maybe when we get back to sales number or volume numbers that track demand a little bit more accurately versus having that inventory component there?

Paul Graves -- President and Chief Executive Officer

Sure. Well, let me try and do that as, again, it's difficult to talk about inventory levels without clear view of future demand because what may have been excess inventory one day with the rebound in demand doesn't feel like excess inventory. But I would say, generally speaking, we have seen lithium hydroxide inventory levels at pretty low levels for multiple reasons that just does not appear to be a lot of finished lithium hydroxides at customers or at the supplier side. Lithium carbonate, we've seen a buildup of lithium carbonate industry at certain customers who had overcontracted as well as some suppliers, who have built inventory because carbonate sits for quite a long time, clearly, and have built inventory ahead of the future largely because it's just the most efficient way to run your operations.

And so if you can and you can afford it, why not? We see certainly an excess inventory of spodumene concentrate site in China waiting to be processed. It probably hasn't moved that much because of the lack of activity in China in the last three or four months. And we've seen a continued shipping of spodumene concentrate on a couple of suppliers in Australia to China, but that has largely been from their own inventory levels. So some of the spodumene producers own inventory levels have certainly fallen down when you compare their production to their shipments. It's clearly been the case.

So I think throughout the lithium chain, generally speaking, it's a bit of a mixed story. I think if you do get any kind of pickup in demand. I think that most of that inventory will disappear, frankly, pretty quickly. And the only question then will be which pieces of that supply chain can actually increase their production quickly enough. It's probably not the carbonate gas, probably not the spodumene side of a rapid piece of time. But I'm not about to predict that that's going to happen anytime soon.

Kevin McCarthy -- Vertical Research Partners -- Analyst

All right. Understood. And then I was also wondering about the thought process on getting the additional covenant flexibility. Was there something special about the six times EBITDA number? Or was that just the largest number they were willing to give you?

Paul Graves -- President and Chief Executive Officer

The larger the number of them are special it is when it comes to covenant relief, as you know. No, I think, frankly, it's all part of the sense of that nobody wants to run close to covenants. We don't want to the banks don't want it. It doesn't create anything any good dynamic. And so the #1 objective on outside and on the bank side is to make sure the covenants are not even the slightest issue. And so that was really the question of what frames our target for what the right amount of covenant relief was going to be for us.

Mike Harrison -- Seaport Global -- Analyst

Understood. Thanks very much.

Operator

Our next question is from Steve Byrne with Bank of America.

Steve Byrne -- Bank of America -- Analyst

Thank you. I'd like to follow-up on that covenant relief question. Is the EBITDA in that ratio trailing 12 months and given 2020, it's going to be a tough year. Is there not a need for a relief in 2021? Is that 3.5 times limit potentially a challenge for you in the first quarter of 2021?

Paul Graves -- President and Chief Executive Officer

Yes. Look, you're right, 2020. It is a trailing EBITDA number. As is always the case with these bank covenants. They're not quite the same as we report externally. There's always tweaks and adjustments and changes to them. But yes, it is a trailing EBITDA number. But frankly, our expectation is that facility that has those covenants in it will be taken out by a different depth piece of debt before the end of the year, when that's more appropriate to where we are.

As Gilberto mentioned, we've already started the process of conversation with our banks to say, look, let's structure something that makes more sense to live and what our investment profile is, what our earnings profile is because bear in mind, this is a facility that we inherited from FMC, it was designed to be a temporary facility such that it got us through the first phases of liquidity, and it was always the intent to put in place a longer-term type capital structure than this. And so we would expect to get that done at some point this year.

Steve Byrne -- Bank of America -- Analyst

And wanted to ask you about the deferral of Phase one in Argentina, does that lead you down a path of at least looking over the menu of other technologies in development that might help you increased productivity of your existing brine management down there. I understand there's some membrane technologies that can help extract that lithium and lead to less waste? Is there anything on the technology front that is looking more interesting as an alternative to building another set of evaporation bonds?

Paul Graves -- President and Chief Executive Officer

And just to be clear, we're actually decommissioning area evaporation bonds, not building new ones. I think it's an important difference we don't have a great deal of waste. Our yield on the brine, as it comes out in lithium terms, is well north of 90%. And our existing technology. And again, we have four I think four now evaporation and part of our plans for the expansion was actually to decommission them because, frankly, we don't need them. We don't really use them. They're expensive to maintain. They're certainly expensive to build.

And they, as I said, I don't really need it for our process. So when you talk about you hear a lot of people talk about direct lithium extraction and some people have different definitions of it. We've been practicing direct lithium extraction since we started this facility in the late '80s, early '90s, and we'll continue to use that technology. So no, I don't see making a yield on operating difference was in Argentina.

Operator

Thank you. Our next question is from Joel Jackson with BMO Capital Markets.

Joel Jackson -- BMO Capital Markets -- Analyst

Hi, good afternoon. Paul, on challenges right now. There are challenges right now. I do appreciate the commentary about wanting to stop the project, the expansion project at a good state to be able to repay some up down the road. But why not just stop right now, save the money and try to really protect the company and the balance sheet as best as possible here?

Paul Graves -- President and Chief Executive Officer

So when you say stop the I'm not sure it's Joel, I understand. We've stopped all projects.

Joel Jackson -- BMO Capital Markets -- Analyst

Well, you say stock, but you've got a $59 million of capex left in the last three quarters of the year, $40 million is going to be growth capital, right?

Paul Graves -- President and Chief Executive Officer

Right. Right. So let's just be clear on that. The vast majority of that is paying for stuff we already spent before we started, right? Because as I'm sure you know, the timing of the cash going out the door is not the same as the contracting or the commitment or the work getting done. We don't pay in advance. And so what you're seeing there is the runoff of the capital commitments for work already done. So frankly, there is no work being done.

There's a small amount still being done in China to complete both the corona and the hydroxide units because their modular units largely complete. So there's some capital going to go into completing them, but it's not a huge amount to be perfectly honest, but there will be no new contracts, no new spending initiated and hasn't been since the start of March now. And so this is just a normal timing lag of, frankly, paying our suppliers, our contractors, our engineers for work that they've already done.

Joel Jackson -- BMO Capital Markets -- Analyst

That's helpful. And then if you're going to bring on the two phases for carbonate together, that's a pretty good chunk of capacity in 19,000 tons in one slug. We've seen SKM challenge to really ramp up their operating rates or sorry, to sell and building inventory. So what is the when you think about that strategy potential strategy change, what are the concerns at trying to be that much on a one-time could be too much for that year?

Paul Graves -- President and Chief Executive Officer

It's a great question. The reason that we actually did the expansion of the way we did it was to try and phase it from a technical perspective and an engineering risk perspective, more than a supply perspective. Bear in mind, as I said, it's now likely to be 2022 before any of that material comes along I would actually be quite happy if we could do that and bring it all online and not bring hydroxide on at the same level, simply because it gives me that balance that I've been seeking for a few years now to try and get longer and carbonate and we are one of the world's lowest-cost producers of carbonate down there.

And so bringing it all on in one go, what will I do with it? Perspective doesn't confirm me really that much. And I think given everything that we've learned and the confidence we've built out of our success in the project today, I personally believe that the technical risk of doing two phases are probably not as great as than we might otherwise have thought. That's not to say it's the same. It's different execution and it's different risks. And it certainly does take the risk that maybe the lithium market isn't where we think it's going to be in 2022 or 2023 when it does come online.

Operator

Thank you. Our next question comes from PJ Juvekar with Citi Group.

PJ Juvekar -- Citi Group -- Analyst

Hey, I got one question, but it's a bit comprehensive question. So you talk about localizing the lithium supply chain away from its heavy reliance on Asia. And what does that mean? Does that mean you see more hydroxide plants built in being built in Europe and U.S. who sort of spends that money? Is it you guys or the auto industry? And when do you think that will happen? Do you have a time frame in mind when these plants are supply chains can move? Because it's really important for the lithium industry.

Paul Graves -- President and Chief Executive Officer

It's a critical question, PJ, let's just step back a little and understand what you can and can't do in short order and what the challenges are. The first and single biggest factors where the resources, right? If you really want to localize supply, you should, frankly, put as much of production as close to the resource as you can. But I think we know that Argentina and Chile are not going to suddenly develop cathode material businesses. And we've seen the challenges in in Australia, sorry, of building spodumene conversion plants at the mines in terms of capital cost and operating success or otherwise.

And so the first thing you have to start to step back and think about, can we actually come to a different business model that allows us to stop shipping spodumene concentrate around the world. And now clearly, shipping carbonate the antihydroxide is one way to do it. But it's a limited there's only so many of us have actually got the capability to do that. And there's only so many low-cost lithium carbonate, brine-based lithium carbonate resources available to do that. And so it's not easy to see how you localize the production of either hydroxide or carbonate.

I think the second challenge, which is maybe a bigger one, to be perfectly honest, is what are you localizing against? If you're localizing against the ultimate, if you can't localize with the mine or the resource that maybe you can localize with the consumer, but there's a step along the way, which is you you cathode active materials. And there's very few cathode active material plants being built outside Asia at the moment. There's a big one going in Europe or maybe a second one. So I think Europe is trying to get there.

But still, your challenge is, this is a supply chain that has remote resources concentrated geographic cathode material plants, but then a very diverse set of end markets, whether it's the U.S., Europe or various Asian markets. So the real question is what does localization really, really mean? And the short answer to that is, I think every environmentally sensitive consumer sensitive carbon conscious seller of vehicles is wrestling with that question and trying to understand how far can we localize and how long will it take? I don't have an easy answer for you, PJ, it is a key question.

PJ Juvekar -- Citi Group -- Analyst

Great, thank you very much for that explanation.

Operator

And I will now hand the call back over to Daniel Rosen for closing remarks.

Daniel Rosen -- Manager Investor Relations

Thank you, Tina. That's all the time we have for the call today. We will be available following the call to address any additional questions that you may have. Thanks, and have a good evening, everyone.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Daniel Rosen -- Manager Investor Relations

Paul Graves -- President and Chief Executive Officer

Gilberto Antoniazzi -- Chief Financial Officer

Don Campbell -- Goldman Sachs -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Chris Parkinson -- Credit Suisse -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Mike Harrison -- Seaport Global -- Analyst

Steve Byrne -- Bank of America -- Analyst

Joel Jackson -- BMO Capital Markets -- Analyst

PJ Juvekar -- Citi Group -- Analyst

More LTHM analysis

All earnings call transcripts

AlphaStreet Logo

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Livent Corporation Stock Quote
Livent Corporation
LTHM
$22.17 (-2.29%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.