AMG Critical Materials N.V.

Welcome to AMG's second 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 second quarter 2021 earnings press release issued earlier today is on AMG's website.

Thank you, Michele. With regard to COVID, active cases at AMG have receded to a very low level.

However, it is with our deepest regret that I have to inform you that AMG experienced its first COVID-related fatality. We continue to apply all safety measures at our disposal with the highest degree of attention in order to ensure our employees are working in the lowest-risk environment possible.

All three of AMG's segments -- reporting segments performed well in Q2 and global demand for our products continued to strengthen throughout the first half of 2021. In 2007, we introduced AMG to the public markets as a producer of critical materials.

The real meaning of criticality has become more apparent over time. And in particular materials associated with electricity storage are now perceived as especially critical because increased electricity storage is required in order to enable higher utilization of renewable energy production.

Thank you, Heinz. I will be referring to the second quarter 2021 investor presentation posted earlier today and to start with the cover of that presentation shows a recent picture of our new Zanesville vanadium facility.

Turning to page three. This shows an overview of the financial highlights for the quarter.

Revenue for the quarter increased by 44% to $298 million. This increase was mainly driven by an improving price environment and increasing global demand for our products, which led to higher sales prices and volumes across all three of our divisions.

Q2 2021 EBITDA was $31.4 million. This result was over 4times higher than Q2 last year, which represented our lowest profitability during the height of the slowdown due to the global pandemic.

As you can see in the lower left corner AMG has sequentially increased EBITDA every quarter since Q2 2020. Net income attributable to shareholders for Q2 was $3.6 million versus a $12.5 million loss in the prior year.

Turning to a review of our three segments. Let's start with AMG Clean Energy Materials, which is shown on Page four of our presentation.

Clean Energy Materials comprises our vanadium tantalum and lithium businesses. On the top left you can see that Q2 revenues increased by 70% versus the prior year.

This increase was driven mainly by higher volumes of vanadium tantalum and lithium concentrate and higher prices in vanadium and lithium concentrate. Our realized spodumene prices were lower than market prices due to a two to four month lag associated with contractual terms.

Thank you, Jackson. Our businesses are extremely well positioned to capitalize on the global transition to clean energy and our operating objectives continue to be to ensure that we are the lowest-cost highest-quality producer in all of our businesses and deliver our strategic investments on time and on budget.

In regard to general market conditions, demand and prices for our products continued to improve and strengthen in the second quarter. That being said, we believe that in a number of cases this is the beginning of a longer-term trend.

Worth noting is that the spot ferrovanadium index price in North America is today below the five-year average and actual sales prices are as much as 20% below actual sales prices in Europe and China. This discount in North America is unsustainable in a region that depends on imports for more than 50% of its requirements.

Thank you, Eric. AMG is in motion.

The critical material space is a very dynamic territory. Earlier, I talked about strategy, but before I close with the outlook statement, I want to comment on three strategic highlights which illustrate where our value creation efforts coincide with our efforts to continuously upgrade our ESG profile.

First, and that's on circular economy, after extensive tests, we are building a plant in Nuremberg to produce high-purity vanadium from all of the spent catalysts. Our intention is that this vanadium will be used for electrolytes in vanadium redox flow batteries.

This project is especially relevant for Shell AMG recycling B.V., because it will provide a differentiated and growing end use for the large-scale spent catalyst projects it is pursuing in the Middle East. Second, again circular economy and electricity storage.

AMG's engineering is building AMG's first industrial battery a hybrid lithium vanadium redox flow battery system for use in one of our operating units to flatten production-driven spikes in electricity demand and thereby reduce CO2 emissions and energy costs. We believe the addressable market is very large.

Our battery is a replacement for the traditional diesel engine generator that is deployed in many industrial sites to manage spikes in electricity demand. AMG refused to install such a generator due to the negative effect on our CO2 footprint, and we believe that in the future many other companies will want to follow our lead.

Yes. Good afternoon, gentlemen and Michele.

Martijn den Drijver, ABN AMRO ODDO. The first question is with regards to the movement in sales and gross profits in two divisions.

I can't get my head around, what's happening in clean energy materials from Q1 and Q2. You had roughly $20 million incremental sales revenue, yet your gross profit before exceptional items has remained stable.

Can you provide a bit more color on why that is? And I have follow-up questions.

Well, that's really driven by the fact that, as I think you know, we provide vanadium back to our suppliers, so we move up with the price of the vanadium and keep our margin constant. It's also due to what Eric mentioned with the lag on spodumene.

So our prices on spodumene reflect effectively last quarter.

Okay. Let's take that at face value.

Now, a similar question for Critical Materials Technology, again, the delta versus Q1 $11 million gross profit before exceptionals. How have you changed?

What's the explanation here that there is no tipping fee here in Critical Materials so perhaps you could shed some light on that development?

Again, I think as we've spoken about in the past in our chrome business as well as our titanium alloys business, we attempt to have a constant margin above raw material price. And so prices go up and our costs go up at the same time, and we get the same margin, so it isn't a margin-exposed business.

You might have a point on what's our leverage to increasing prices in CEM, but that's largely muted by the fact we give again two-thirds of our price back to our suppliers. So it's basically the same answer.

Okay.

Especially in titanium alloys, for example -- excuse me, in titanium alloys and chrome metals we are essentially talking about conversion businesses. That's an enormous advantage of having stable margins.

Okay. I get the part about gross profit so that's the element I get.

But then you would expect if you have your -- well, let's move on to another question. You mentioned a solid state.

You mentioned the hybrid lithium vanadium. You mentioned that Germany and the vanadium pentoxide.

What CapEx have you spent on those three projects and what should we take into account going forward? Is there any change in your guidance with regards to CapEx?

No.

Yes. So we gave you $180 million -- we gave you $180 million guidance last quarter.

We would increase that maybe to $200 million, but it really depends because we're busy spending money on our Zanesville facility and when the bills come in matters a great deal obviously at this last stage of the project. In terms of CapEx associated with the two projects, it's far too early to discuss, but it's not going to be significant.

It's not a significant investment if you branch out to say something, it is below $10 million.

Yes.

Okay. Got it.

And then on the slag remediation in New Jersey, I asked the question I think it was one or two quarters ago about that. You at that point said that there was not going to be any more remediation cost and now its $11.7 million.

Are there any other sites that we should be aware of where is such a remediation risk?

No, it's the only one and it's the very end of a 30-year remediation.

Okay. Okay.

Well, that's it for now from my side. Thank you.

Hi. Good day all.

Thank you for taking my questions. I had a couple also.

Maybe firstly on the engineering order book, when you look at the order book today, I think you gave a comment that you sort of see a stable sequential order inflow that is mainly related to the remelting and induction furnaces. But can you give me an approximate amount of how many orders related to aerospace and related to the turbine blade furnaces are now in your order book?

Or is that zero or almost zero at the moment?

In the existing -- I didn't get it -- in the existing order book how much is aerospace related?

Yes. How much is still aerospace related?

Because in the previous quarters I think the volume the order book volume has been mainly driven by non-aerospace related orders or furnaces.

I would say that about half of the order book is related to turbine blade furnace, which is clearly aerospace.

That is still the case in the current order book?

Yes. Well, this is a very dynamic sector.

And the question is difficult to answer, because for example, if you are building a large remelting facility for an Asian customer, you do not know what the industrial allocation is of this customer's end products, so we are hesitant to make exact predictions. The largest single order inflow other than aerospace -- direct aerospace such as coating is recycling.

Most of the furnaces which we sell into the metal industry of the world are used for reworks and for scrap treatment.

Okay. That's clear.

Then on the lithium expansion plans that you have currently you gave some incremental information already in the press release. We also discussed this last quarter.

But my first question there will be have you -- how does it look on the potential offtake agreements? And the second question would be on, yes, I guess, you still plan to install, let's say, the first 20,000-ton capacity where you also have the engineering assigned now.

Can you at this point provide us with more information on how the -- let's say, how the earnings -- how the earnings will look for that incremental $20,000? And then I have another question related to lithium.

But there was a host of questions here.

So I'll take this for battery-grade hydroxide.

Yes. It is not an industry where you are making offtake agreements, unless you have commercial agreements which have subjects where you can drive a truck through.

And what are these subjects? It's quality specific for the use.

How this works is the elaborate test series is ongoing with each of the customers, where the customer demands through all laboratories are matched with our optimization of what we will produce. And these are very elaborate procedures ongoing.

It's a chemical product. It's not copper for lump metal exchange where you drive -- where you do a long-term contract.

So these are emerging customer relationships, deeply embedded in test procedures and technical discussions. So that's to be not confused with commodities.

This is a very complex product. And the complex product has to be neatly fitting into the very high-quality standards of the customers and vice versa.

As regard to the profitability of the investment to increase our -- to increase our production following production in spodumene production in …

Hydroxide.

What is the question?

The profitability associated with our 20,000-ton battery-grade hydroxide. We're not at the point -- we haven't finalized engineering.

So we're not at the point to …

Well our general policy is that we don't authorize and unless you're -- when you divide CapEx by the normalized annualized EBITDA, if that multiple is higher than four then it doesn't get also added, so, that should give you a guidance for that. What else was …

No. That was it, I think.

That was it.

Okay. That's very clear.

Because I mean at the same time, you see a lot of automotive players also this quarter sort of dealing their EV plans and their investment outlay. I mean, you plan to spend about $100 million of CapEx on this project in the next two years.

And at the same time, I think investors are also asking, where do you, get the spodumene supply because there's a lot of spodumene needed to -- already for this first 20,000. So when do we get -- when is the plan that we do get …

We are in highly confidential negotiations with a variety of potential and existing export spodumene producers. And the result of that is a very elaborate map of spodumene potential for our modules.

And we are confident to be very successful in that effort. We have a very attractive mix which we can offer to junior minors which look for offtake agreements and which look for technical assistance, and which look for financings of import streams into Germany.

So I don't think that is a bottleneck.

Okay. Thank you for that color.

And my last question will be a follow-up on Martijn's question on environmental expense in the P&L. And just for my idea it was not very clear to me is it also already embedded in the cash flow statement?

Or is it the provision now? And when will we see that cash out of $11 million -- of almost $12 million?

So it's completely provided for and has already in fact been shipped. But we do have a supply chain financing agreement with the waste provider.

We took a decision to accelerate getting rid of the slag. And as a result we received some attractive supply chain finance.

So the cash out will be over the next 18 months.

The decision had to be…

Okay. Thank you.

…the decision was between doing it year-by-year. We decided to accelerate and get it behind us.

Well. That's great.

Thank you.

Good evening. It's Martin from .

You mentioned in your press release that you see the market potential for hybrid lithium vanadium redox flow batteries as very large. Could you give some more color about how you see that evolve over how many years?

And what kind of objectives you have to cross what part of the market you intend to graft?

Yes. That is an interesting question.

We had in -- we have in several of our operating units like a myriad of similar operating units around the world, we have erratic electricity demand profile. Because when you turn on, for example, an electrical arc furnace when the arc is closing, the electricity demand shoots up, I don't know, five times or eight times or whatever.

When you have a raw gas mill, same thing. That is penalized by the utility, because the utility favors when they have the right to interrupt delivery, but they penalize you when you interrupt their continuous delivery profile.

So, you have high cost when you have such a profile. The traditional way of dealing with that is to build a standby power plant and the classic way to have that done is a diesel engine island standby power plant.

That's exactly what's the proposition of one of our operating unit managements, and in thinking about that through our laboratories and through AMG Engineering, we came to the conclusion that it is a much better solution is a lithium vanadium hybrid battery. Why?

A vanadium battery is low-cost and easy to handle. However, it has a slow discharge.

Lithium discharges in milliseconds. So the result was since such raw gas mill or such as electrical outflow needs very, very quick reaction, you needed a lithium battery for that.

And then, the lithium battery then gets being recharged by the vanadium battery, which gets recharged by a continuous flow from the grid. That saves electricity and it takes -- it avoids penalties, saves electricity and avoids other environmental negatives associated with diesel engines.

So therefore, we decided this is a much better solution and obviously we know that a very large number of people have the same kind of decisions. And you can Google that annual demand of diesel engine, power plants for industrial solutions island power plants around the world and you come to a very high number.

So, we -- I think the marketing potential of that is obvious.

Maybe as a follow-up -- maybe a follow-up, if a client would purchase such a system what would be his earn back time?

I said we wouldn't invest if it's not -- if it's exceeding four times the ratio between investment and annualized, in this case savings, normalized savings. It's very profitable, because the penalties are very high for such erratic profiles.

So it's the saved electricity cost finance the battery. And by the way, we are selling vanadium on the side into that system.

As a vanadium producer, that's not bad at all.

Okay. Thank you very much.

That completes AMG's second quarter 2021 earnings conference call. Thank you all for joining.