AMG Critical Materials N.V.

Heinz Schimmelbusch - Chairman and Chief Executive Officer Jackson Dunckel - Chief Financial Officer Eric Jackson - Chief Operating Officer Michele Fischer - Vice President, Investor Relations

Welcome to AMG's first quarter 2021 earnings call. Joining me on this call are Dr.

Heinz Schimmelbusch, the Chairman of the Management Board and Chief Executive Officer; Mr. Jackson Dunckel, the Chief Financial Officer; and Mr.

Eric Jackson, the Chief Operating Officer. AMG's first quarter 2021 earnings press release issued earlier today is on AMG's website.

Thank you, Michele. AMG's highest priority is the health and safety of our employees.

Out of over 3,000 AMG employees at 33 sites in 15 countries, AMG has 9 active confirmed coronavirus cases globally. As previously announced, AMG has adopted a new segmented fracture for 2021 which we’ll provide investors increase transparency into our business and enable them to track the strategic differentiation more accurately we’ve seen in the portfolio of our activities.

Thank you, Heinz. I'll be referring to the first quarter 2021 investor presentation posted earlier today on our website.

The picture on the cover shows our Zanesville Vanadium facility, which is currently under construction. The completed raw material storage building is on the left, and a conveyor belt connects it to the roaster and the flue gas desulfurization facility behind it.

Starting on page three, this shows an overview of the financial highlight for the quarter. Revenue for the quarter decreased by 5% to $264 million.

This decrease was mainly driven by lower revenue in the AMG Critical Materials Technologies segment as a result of the aerospace slowdown. Q1, 2021 EBITDA was $28.3 million, a 27% increase over the $22.3 million in Q1, 2020.

It was driven largely by higher sales prices and sales volumes in most of our commodities in the Clean Energy Material and Critical Mineral segments. These stronger volumes and prices, combined with the lower operating costs across our business as a result of cost cutting led to the improvement versus Q1, 2020.

Net income attributable to shareholders from Q1 was $5.1 million versus a $13.6 million loss in the prior year. The loss in the prior year was primarily due to an $11.7 million non-cash deferred tax charge in Brazil.

Now, I’ll turn to a review of our three segments.

Thank you, Jackson. AMG's first priority is to provide its employees with a safe working environment.

AMGs loss time incident rate and total recordable incident rate continue to substantially outperform our peers. Additionally and as Dr.

Schimmelbusch mentioned, nine of our more than 3000 employees in 15 countries are presently COVID positive. In addition to safety, our operating priorities continue to be to maximize cash flow, lower our cost structure, manage risk and deliver our major strategic initiatives and investments on time and on budget.

In regard to the general market conditions, with the exception of the aerospace market, demand and prices for all of our products bottomed in the second and third quarters of 2020, and continue to improve throughout the first quarter 2021. We believe that these market index prices reflect strong supply-demand dynamics as the economy continues to normalize.

We are well positioned to continue to capitalize on price improvement going forward. And as we have previously stated, a significant part of our business, especially in Clean Energy Materials and Critical Minerals is priced on a prior month or prior quarter average index basis.

In addition to our continued focus on cost reductions and working capital management, we progressed a number of important initiatives in the quarter. We are progressing our spodumene production expansion project in Brazil and it's worth noting again that our spodumene facility set a quarterly production record in the first quarter as we exceeded nameplate capacity on a run rate basis.

The construction of AMGs second pair of Vanadium plant in Zanesville, Ohio, AMGs largest ever capital project is proceeding as planned with commissioning slated to start at the end of the first quarter of 2022. AMG Vanadium also signed a new long term multi-year agreement in March to process and recycle spent catalysts for a major oil refinery operator in North America.

As Dr. Schimmelbusch noted, AMG purchased a site on the premises of Chemiepark Bitterfeld-Wolfen in Germany, advancing its strategic expansion project for a battery grade lithium hydroxide production plant, which will reliably supply the European battery industry.

The impact of the coronavirus continues to be most acutely felt in our aerospace related end markets. However, our engineering order backlog remains strong and we are seeing improved activity, especially in the super alloys sector in Asia.

We have right-sized this business to reflect today's market and we're well positioned to capitalize on aerospace related market opportunities as they improve. Again, operationally we continue to focus on those parts of the business that our under our control and progress operational initiatives and strategic growth projects.

Now, I’d like to pass the floor to Dr. Schimmelbusch, AMGs Chief Executive Officer.

Thank you, Eric. Due to improving market conditions, AMGs financial results for the first quarter were above previous expectations.

We believe that these improvements will continue as we advance in 2021 and as such we are updating our outlook for the full year to exceed $120 million EBITDA. AMGs long term guidance will be detailed at the Annual General Meeting tomorrow at 15:00 CEST.

Operator, we would now like to open the lines for questions.

Hi guys, can you hear me? : Yes.

Yes, okay. Thanks a lot.

I mean congratulations for a great quarter. I have three questions, firstly for Eric.

As you mentioned that in the Critical Minerals and Clean Energy, the TDS rate is a lag of one quarter. So just to clarify, I mean the prices what’s already named in the ferrovanadium are the largest and its exposure, those were like dips, it’s like a 400 and 10.5 in the fourth quarter ’20.

So is it fair to assuming that the results in the first quarter are based on those prices, while the has probably been tried and sort of Vanadium increasing significantly, those numbers are going to get slashed in the Q2 ‘21 earnings.

I didn’t hear all of that clearly, but you’re right, really the lag in prices mostly impacts spodumene and ferrovanadium. But it’s a month lag and in some cases a quarterly lag.

But, maybe if you put your phone on mute, just – we are hearing a lot of background noise. So market prices have continued to improve and as prices improve generally, they'll be reflected in our results.

: There is a certain time lag.

Yeah, yeah. Hope that answers your question.

Okay, yeah, got it. The second question which is sort of me that, in the Critical Minerals, if that revenues have gone up significantly 30% in the quarter, mostly in the last quarter, while the EBITDA is sort of flat, is there something we should know about the decision in terms of the product pricing time lag or it’s just that the cost base in moving up, limiting the profitability.

I’m sorry in Critical Minerals you're saying.

Yes.

So I see revenue going up the same percentage roughly as EBITDA, say 30 – and as gross profit. So it's roughly 30% across the board.

It’s actually very consistent.

Yes, that’s where the diversion is. I mean you are looking at you know gross profit increases, I was looking at EBITDA increase.

Is there any SG&A playing a spoilt sport here or am I missing anything?

No, so I'll just read you the – revenue increases was 26%, gross profit before non-recurring items is 27%, so tracked along and then increase in EBITDA was 32%. But if you look at, it's a $2.8 million increase in gross profit and a $2.2 million increase in EBITDA, which is basically because we had a slight increase in SG&A.

But when you work the numbers through, it shows a slightly higher growth in EBITDA, just because of the size of the…

Yeah, yeah, I was asking more to the quarter-on-quarter compare issues and I understand you are referring to year-on-year comparisons. Nevertheless, it’s okay, fine with me.

So were you looking – I was looking Q1 ‘21 versus Q1 ‘20.

Yeah. Nevertheless, my last question is on the VCU.

So just to refine my understanding, in the detailed presentation you have made in April, you have said $81 million of revenue come from ECOR enabled projects, ECOR sorry. And then you’ve given a number close to $57 million tons of you know carbon deduction.

So is it fair to assume that once the process continues May 2022, you will be able to get the carbon credits equivalent to that 56 million tons and then you will be able to sell those units into the market. : No, look this thing goes step-by-step.

We announced that for the first time we have made substantial progress in a pilot project of establishing a methodology which is accepted for trade on a voluntary exchange for carbon credits, for recycling in metals. And that's the methodology will be used by us and hopefully also by other people who then contribute to that thing, and we are in a period of public command, and for further scrutiny, because these exchanges have a very solid scrutiny procedure.

Now that’s a balance. We will – if we are trading in maybe in August or so, but this is forward-looking statement, we don’t know when exactly that happens, but we assume we will be ready for this trading, our Carbon Credit potential later this year and then we will expand that to other recycling products in ANG, which are obviously part of the enabling carbon CO2 reduction portfolio, and step-by-step we will increase hopefully that trading volume.

We don't believe that will go fast. We think it's extremely significant for us to be making progress step-by-step, because eventually we then will have a much higher volume here, but as I said, we are realistic.

It is a very complicated procedure to register such products and it seems very innovative, and it’s a new territory everybody has to learn.

Got it, understand. So is there any really – I mean we can sort of work out that how much of the million tons of CO2 credits you will be able to get in next five years of so.

: No, that we cannot reliably make that prediction. We – the 67 million in ‘19 and 55 million tons of CO2 in ‘20 has an enabled production number.

It’s very much on our mind as regard to putting it into a formalized planning system. We have – as we say, we have lot of candidates joining that so called enabled CO2 reduction portfolio.

So that will grow and presently in a very rough way and it’s on the website, roughly 30% of our sales are coming from that portfolio. It’s growing.

We are strategically intending to – no timeframe – to have the majority of our sales in that category as a next big target, because we have proof that our long term profitability in this portfolio exceeds the long term profitability of the rest of the company. So as these materials and product line joined – additional materials and product lines joined this portfolio, the portfolio will grow, but also it is certainly cyclical as we have seen in 2020, because of the aerospace which is a massive indicator of the aerospace market is very important for this deduction portfolio.

So not only are we going faster in this portfolio, but also the gross profit ratio is better in that portfolio than in the rest of the company. So we have all reasons to do that.

It is interesting to note that the financial performance is better and the CO2 reduction performance is better. So that’s a great alignment and it also substantiates our strategy, because our strategy targets innovative green if you want to say so products and we are very pleased that this green products are a more profitable business than the rest of the products.

Okay, quite clear. Thanks a lot.

I'll go back into the queue.

Yeah, well I didn't get that you actually mentioned my name. Yeah, good evening gentlemen; Martijn den Drijver, ABN AMRO.

Yeah, a couple of questions: first of all Dr. Schimmelbusch would you be so kind as to provide, you sometimes do that, an overview of the developments in Vanadium in terms of supply, demand and what you see in the competitive space, that would be my first question.

The second question is with regards to lithium hydroxide plants in Germany. You’ve now purchased the lands; you already indicated that you're ordering the long lead items.

Can you update us on where you stand on the off-take agreements? Is there any progress that you would like to mention and perhaps if possible if you're going to go for a 40,000 ton trade in one and two, which could be a possibility, which seems logical, could you tell us a little bit more about possible synergies and cost savings if you go for somewhat enlarged project planning and then I have two more households questions, but lets deal with these ones first.

Thank you.

Well, the structural situation of the vanadium market is positive. Historically the market was characterized by under supply in the rest, outside China, which was then filled by exports from China.

The picture has changed it seems, but everything is of course to be obviously affirmed statistically, but it seems that China is importing, maybe importing Vanadium. That was certainly the reason for the slight correction of the Vanadium price upwards, towards the long term averages.

You can be very positive on the capacity utilization of United States Steel Industry, which has of course that much higher specific consumption of Vanadium per ton of steel than the rest of the world. You can also – it is also clear that the Chinese steel industry is upgrading, not only quantity wise, but also quality wise, and famously our legislation is the framework for that, but it is also in the economic interests of the steel producers due to upgrade.

So that’s quantity wise and quality wise. So that is underpinning the long term solidity of the Vanadium market.

We are the world's largest recycler. We will double our capacity.

We are very, very happy about the focus of the project, which is a big statement, because it's the latest project we ever undertook, I mean by far. And of course we will, as the only producer of Vanadium in the United States, we are having an advantage vis-à-vis the competition you asked about competitive situations.

We have an advantage vis-à-vis the competition in two ways. First of all, we are local.

We are in tracking distance of the customer, and secondly we are recycler. We are fitting very well in the sustainability reports for our customers.

So I think it's a very good situation, to be a low cost producer as we receive fees to take the material and as a reward for that we share certain portions of the sales with our suppliers. That is a harmonious situation and so life is good in Vanadium County.

Can I ask a follow-up, on those remarks? You mentioned heightened utilization levels with steel production in U.S.

and there's an executive order that as far as I understand prohibits imports of Vanadium, but also there's regulation against exports of Vanadium. So if utilization levels in U.S.

steel industry are high and next year you are going to bring additional Vanadium capacity onto the market even though you have an off-take agreement already, what does that imply for the vanadium price?

The Vanadium price is strong and I don’t think that this will have any significant influence on the Vanadium price. We had not compared to the market size, not a significant number, and by the way your statement on import restrictions and export restrictions is wrong.

We are not in any way restricted to export, and we are not in any way restricted for U.S. – United States is not in any way restricted to important.

But there are of course natural hurdles, because it’s a long logistics route to import such things from Latin America for example.

I understood that the executive order that was issued by Trump was to protect the U.S. Vanadium industry, so that would limit imports.

No there is…

There is also regulations.

There is no regulation in effect. There is no regulation in effect that I know of and I should know I think.

Yeah definitely.

So now let’s talk about lithium. Our project is proceeding as planned.

Our discussions with a variety of potential customers is proceeding as well. This is a very intensive process, because we are – this is a highly sophisticated product.

But the chemistry has to be harmonized, is the chemistry of the potential buyers and that implies lengthy tests and we are prepared for that in a way, because we have invested a lot in the broadcast, in the product where these harmonization happens. And so we are in the middle of this, and this will be taking time, and there is on the other hand, there is very high demand.

So we will inform when we have confirmed the details on that, but as we say, the demand is very strong. We have also in mind and your right, we have in mind that the first module is the first module of a series of additional modules.

We are estimating and other people are estimating that the conservatives number for the total demand in Europe for lithium battery grade hydroxide is in 2030, 600,000 tons. Our first module is 20,000 tons.

There will be a strategy to get other modules. We cannot – we don’t want to say in what sequence and in what timeframe, but we are not intending to build a 20,000 ton plant, because that was an insignificant player in this area and we don't want to be an insignificant player, and I want to quote one customer whom we approached quite some time ago and we say 20,000 tons, and he said, ‘Oh!

That’s my demand next year. So is that all?’

he said, so that's the situation. So let me mention, that your next question of course will be where does this come from for an additional module.

Well, we have very definitive plans, how to approach other resource owners over here in progressive discussions with such research owners who are most happy to join a long term relationship with us. So that is in parallel; that is peripatus as they say in Latin.

Okay?

Okay, yes, thank you for those clarifications. And then just two small household questions and then I’ll go back into queue.

How much did you spend on the land that would be a question for Jackson. And so we have a pure CapEx can be calculated from other strategic projects.

Let me answer. We don’t discuss that.

Okay. Then I will go the final one.

We have agreements with the seller for EBITDA too, to answer that question.

Okay, can you say something like low single digit, low double digit?

Yeah, exactly. Very, very – not enough to disclose, let’s put it that way, for us to give you a good guidance.

Okay, got it. And then my finale one, the $20 million prepayment from the lithium spodumene customer; has that been paid in Q1 or is that going to be received by AMG.

: It has been paid in Q1.

Great! Thank you very much.

I'll go back in queue.

Yes. Good afternoon and thank you for taking my questions.

My first question is on the spodumene pricing. On slide 11 of the presentation you provided spodumene spot price of 630 per ton versus about 450 per ton in the first quarter.

My question is whether it's fair to assume that your 2Q selling prices is above that level, the 630, given the stronger rally in carbonate price, is where your contract is based upon. Is that a fair assumption?

Well, I don't have those numbers exactly in front of me. But clearly our – we sell with China and in our pricing, we won’t go through the details of the contract, but our pricing is based on lithium carbonate prices, with approximately a three month lag.

That's where our pricing is.

And so to your answer to your question is, because these are Chinese spodumene prices, a lot of these Chinese contracts are related to lithium carbonate. So it tracks the lithium carbonate price.

So, it's a good approximation

With the time lag.

With the time lag.

But the 630 that you mentioned here, is that Australian spodumene or benchmark minerals or is that the price that you assume based on the lithium carbonate price.

Its benchmark minerals.

Okay, so that's Australian spodumene then?

No, it should be Chinese.

Okay, okay understood. So, there's no real discrepancy between your selling price?

We’ll footnote that in the next one, so that you can follow it along. But yes, it should be...

Okay, thanks. Okay, understood.

So there's no real discrepancy between the prices that you mention here in the chart and what you're actually seeing in your sales. Second question is also on lithium.

You know it’s a time lag. : The time lag is important.

Yes, yes, yes understood, understood. So my second question is again on lithium, there is an increased focus on the CO2 footprint of off battery metals, because that is now also taken into consideration by the auto OEMs.

Can you elaborate if and how the German lithium plant plays into that team by I think local conversion for example. It’s probably more CO2 efficient than Chinese capacity.

And then secondly on your spodumene plant in Brazil and also related to that topic, am I right in thinking that this plant uses a low carbon energy source in the form of this hydroelectric power plant or is no longer valid?

First of all, this is a very complex environment. The CO2 discussion about footprints of lithium.

We course stopped this effect that our spodumene is produced partly from paving latitudes which are there from previous mines, mining activities where we did not process the lithium, we only processed the comparable. So partly we feed our operation in Brazil from that, therefore it’s a recycling activity and partly.

And we are actually right now calculating the third party expertise, how much CO2 we are saving by the way of comparing with somebody who does 100% feeds in his operation for mining than from party pavings. That’s a considerable number to start with.

Then, of course the lithium travels long distances and it ends up in Germany and in Germany we are building a plant which is completely optimized as we got to later efficiency and latest emission controls. So, it is a – and that is corresponding with the effect that the casual plants which are our customers, which are being under construction around us in Germany also have the highest environmental standard.

So certainly the dominating idea is that factory materials are in electricity storage materials, and electricity storage is enabling a higher capacity utilization of the renewable energy anywhere, but in particular in Germany. That is the consequence of the fact that the capacity utilization of solar in Germany for example hovers around 10% and the wind – that’s solar.

The wind hovers around 15%. So the enormous – and that is as curtailment of wind and solar.

And if you reduce curtailment, you enable a higher production of renewable energy and that is a massive impact on CO2. So it’s a CO2 reduction, because your percentage of renewable energy goes up and depending on measuring against substituting coal or substituting gas, you can calculate very accurately the CO2 reduction.

So this is all, these are all activities in the electricity or energy transformation phase and are net positive as regard to industrious picture.

Okay, understood, helpful. And so to come back to the spodumene plant, is this using an hydroelectric power source as I found in 2015 presentation or is it no longer the case.

Well, our hydropower plant is very important for us. Now we are hydropower and we are selling the hydropower and we are buying electricity and personally we are not able to trace which electricity portion goes into the grid and which portion goes out of the grid from our – so I cannot prove to you that the electricity which we use comes from the hydropower but it is a net balance.

So you understand what I mean.

Yeah, understood. A follow-up on lithium Germany.

In the past there has been a root to confer technical grades, chemical hydroxide with better grade, is that still an area that you're looking into or will you simply be processing spodumene concentrate into the…

The value chain is converting spodumene into technical grade and technical grade into battery grade, and so that’s a chain.

Okay, I understood. And a final question, a housekeeping question for Jackson I think.

Will you no longer be disclosing the sales per sub-segment in the company presentations or was this slide accidently forgotten this quarter?

No, it was not accidentally forgotten. The sales were not actually per sub-segment, they were per metal, per metal and they led to a lot of confusing conclusions on the part of our investors, and so we replaced that with our three segments, which are a lot easier to understand, because you really have the volatility and of course the investment in our clean energy materials group, and we will of course give you guidance upon you know the price moves within that, but you know that's – this is the disclosure we think will make it easier for us to have a dialogue about our future projections.

Okay, I understood, so a plea to have inserted this quartile .

Yes unfortunately, unfortunately.

Okay, thanks. Thank you, these are my questions.

Many thanks everyone for joining the call, and we hope you're able to watch our webcast tomorrow for our Annual General Meeting on our website.