Jervois Global Limited

Thank you very much, and it's a pleasure to be here today for Jervois' first earnings quarterly conference call following the acquisition of Freeport Cobalt. I'm on the line with James May, Chief Financial Officer, Greg Young, Executive General Manager of Commercial; and Wayde Yeoman, Group Manager of Commercial.

If we move through on the slides, we have the usual disclaimers. And if we can move to the highlights, please on Slide 4.

I guess as I said, I'm really excited to be talking to you today. This is a transformative moment for Jervois, having our first operational quarterly earnings call.

It's been a pleasure in September, getting the weekly treasury reports from James' finance team. We've got incoming revenue over USD 25 million received during the first month of ownership.

And what's most pleasing and why we're having the commercial team online to guide you through what we're seeing in the market is also where the revenue is derived from. It's a broad blue chip customer base of household names of customers across the United States, Europe and Japan.

And it's -- we're really excited to be kind of back in the market again. So in terms of the business itself, a solid first quarter.

Obviously, we only owned the business for September $6.8 million EBITDA for the Q3. Year-to-date pro forma EBITDA of $15 million and pro forma guidance remains consistent with what we articulated in the equity raise.

We won't overlook Idaho Cobalt Operations and São Miguel Paulista despite, obviously, the importance of Jervois Finland to our business today. ICO is now fully funded, construction advancing.

I was at site recently, I'll talk a little about that later in the presentation. And we've also gone underground, which is particularly exciting for the team in Salmon, Idaho.

I'm currently in Brazil, working with the team. We're advancing the bankable feasibility study here in Sao Paulo at São Miguel Paulista and also touch on that later on.

And I guess just on the corporate side, you've seen the announcement this morning with the USD 75 million Mercuria standby working capital facility that, again, James will touch on. He'll touch on the other financial aspects in the presentation, but a pretty significant quarter just given where we came from USD 235 million equity raise, USD 100 million ICO senior secured bond currently undrawn.

That will change obviously as we move through construction and we ended the quarter with USD 31.2 million in cash, and that excludes the escrowed ICO bond accounts. Next slide, please.

We'll move on to Jervois Finland and then I'll pass over to Wayde Yeoman, who many of you -- who did come in on the equity raise as would recall from the time when we were acquiring Freeport Cobalt. Over to you, Wayde.

Thanks, Bryce. And as you said, it's a pleasure to be able to report actual results from an operating company after 1 month of ownership for Jervois.

Sales and business continues at what was Freeport Cobalt that's been rebranded Jervois Finland, meeting in line with our expectations. A good strong third quarter.

While we only owned the business during September, we've reported the third quarter pro forma results, $76.9 million in sales and 1415 -- 1,415 tonnes, which is strongest quarter of the year based on the improved cobalt pricing during the quarter and good strong sales volumes. That brings the year-to-date revenue to nearly $200 million and sales volume nearly 4,000 tonnes.

As Bryce mentioned, it's an ongoing business with sales to a broad portfolio of customers across all geographies and some of the data for the geographies and the segments is here on the slide. If we want to go to the next slide, we have a little bit more detail on the different segments that we supply into, the business analyzes the sales and the 3 different segments, CCC or chemicals, catalysts and ceramics, powder metallurgy and the battery segments.

CCC are the sort of stronger legacy-type businesses that Cobalt has been used in like pigments and catalysts and other chemical applications. And sales for the quarter were -- on year-to-date are strong across all of those applications.

After COVID, things have started to recover during 2021, and we expect 2022 to be -- continue to be strong in all those segments. The powder metallurgy sections, more manufacturing and GDP-type industries, aerospace, automotive, things like that, we are starting to see some recovery in the aerospace industry.

Automotive is less certain. I think everyone's heard of the semiconductor shortage, so that's continue to impact a bit of the business in the automotive.

Mining has been strong associated with the robust commodity situation in the world and we look modest growth in '22 against all of these end-use markets. In the battery market, everyone is aware of the steep demand curve for electric vehicle, EV batteries, and we see that continuing to grow.

Cobalt chemicals used in these batteries are in high demand. Prices for all the components in these batteries are rising, lithium, cobalt, nickel, manganese and battery chemistries are shifting, but the cobalt demand still continues to be very strong.

We see a big demand for cobalt sulfate, which is one of the downstream chemicals produced by the Freeport or the Jervois Finland business. And that leads me just into a little bit of an update on the overall cobalt market.

Cobalt prices have continuously increased over the past months. Prices today runs around the $27.50 per pound mark.

And we see that the supply-demand balance is really being driven by a lot of demand for metallic units into the battery sector. And now we're starting to see some uptick in the demand for the metallic units in the melt sector for aerospace and those kind of applications.

So we're seeing short-term availability very, very tight in the cobalt market. Some of that's driven by logistics and labor shortages that everyone is well aware with the container problems and shipping port congestion and things like that are driving some of the short-term lack of availability, but we see overall demand increasing at such a rate that the markets look strong and tight going forward as well.

On the raw material side going into the cobalt refineries, the cobalt hydroxide coming from the DRC continues to be priced as if that's going to remain tight as well. And so just overall market outlook for cobalt is very strong.

Next slide. Great.

So I'll turn that over to James.

Thanks, Wayde. So I'll just turn into the financial performance for Jervois Finland.

First is sort of worth recapping the real engine room of EBITDA for Jervois Finland business is. It's really the spread between the cobalt price is a key driver of revenue and cobalt hydroxide pricing, which is the key import, the key feedstock, which the business buys to transform into those cobalt products.

And those feedstock supply is typically priced on a percentage payable of the cobalt metal price. Look, on the revenue side, you heard from Wayde, it's -- we've got some good price momentum in the third quarter, as you can see on the chart, it's the strongest of the year-to-date, underpinned by the price momentum that we spoke about.

On the cost side, there's really sort of 3 buckets in terms of the cost structure of this business. There's a cobalt hydroxide feedstock costs that I just referred to.

And as we communicated back at the time we did the equity raise, while we do have some contractual protection in the way our supply contracts are structured. You can see on that bottom chart, the payroll indicator that's up around the high 80s, has remained stable, but at historically high levels.

And so for the portion of where we do have some market-linked exposure in that supply structure, we are -- as Wayde said, participating in a market that is in itself quite tight. In addition, on the cost side, there's been sort of 2 sort of smaller buckets.

There's the tolling costs that we pay in Kokkola to Umicore to process cobalt hydroxide in their refinery. And then there's the cost associated with transforming those cobalt units that come out of the refinery into the wide number of cobalt products that Wayde referred to.

And really, we are starting to see a few cost pressures there relatively localized, but it's something we continue to monitor. It's not out of step with trends we're seeing elsewhere in Europe.

It's pressures around electricity costs and certain chemicals reagents really a function of the wider macro environment as well. So really the key opportunity for us as a business is to really sort of keep pushing in terms of capturing momentum on the revenue side through both pricing and premium and looking to capture as much margin as possible through offsets in terms of how we manage feedstock arrangements and those operating costs that I just referred to as well.

The one specific item I would note as well is when you look at just the single month for EBITDA and revenue, which is a single month of ownership post acquisition, there is a slide sort of quirk to the business model. When you do some of the zoom in on 1 month and we're transitioning through into a higher cobalt price environment, what you do see is sort of an immediate adverse impact to feedstock supply costs, which are priced based on that percentage of the cobalt price.

And we don't really sort of catch up with the corresponding revenue benefit from those higher prices for sometimes 1 to 2 months. So having putting it all together, you've got that sort of a one-off factor that we're seeing in September as we transition to higher prices.

But certainly, we think there's cause for optimism about the future and we also wanted to sort of convey today that when we look at the EBITDA guidance for the full year 2021 on a pro forma basis, that remains at USD 20 million consistent with what we previously communicated during our equity raise process back in July. One final point.

Just talking about integration. There has been a significant undertaking within the business, a huge effort, both from the team in Finland and the wider management team in Jervois.

A number of us were in Finland through early September, really working hard on advancing integration and the transition of that business following the acquisition from Freeport on 1 September. And as part of our growth as an organization and partly out of necessity as we assume ownership of an operating business, we are progressing with a systems rollout, including SAP and the Board has just approved $5 million of CapEx over the next 12 months to deliver that program.

So I think it's something that's sort of really exciting in terms of providing a backbone of our operations as we continue to grow into the future. Next slide, please.

And look, just to touch on working capital. This business is relatively working capital intensive, and there's valid reason for that.

We've got a diverse and specialized sort of product suite. We've got a relatively long outbound supply chain.

And particularly given the nature of what I just described around how key supply contracts are priced. What happens is that when the cobalt price moves up, so does inventory.

Obviously, we ultimately harvest the benefits of higher margin and higher cash in that higher price environment, but it's sort of on the way to those higher prices. What we do see is a requirement to ensure that we invest in working capital really to manage our ability to meet supplier payments and that inventory that's held on the balance sheet at a higher cost.

And so what you've seen really through the course of this year is a growth in terms of overall working capital, predominantly in line with that price growth. We've noted here on the page that the cobalt price at the end of last year was around $15 a pound, that growth in the cobalt price to $26 at September and as Wayde referred to, it's even higher today.

Obviously, great from a business perspective, we'll begin to harvest the benefits of those higher prices, but it does mean we do have this investment requirement in working capital. And so really excited to announce today and hopefully, everyone had a chance to see the announcement, we have announced a working capital facility with Mercuria.

We'll come on to talk about that later in the presentation. But really what that does do, a key part of implementing that is really to enable us to have the right sort of financial tools and the right level of flexibility such that we have the funds available in an appropriate way to continue to manage those fluctuations in working capital as we set ourselves up for long-term success.

Then I'll pause there and hand back to Bryce to talk about ICO and SMP. Sorry, we got to pace before that.

Wayde, do you want to talk about the next slide?

Yes. Thanks, James.

We do want to highlight how important ESG issues are for Jervois and that Jervois Finland is definitely a leader in all aspects of ESG compliance. They are the first cobalt chemical producer that's achieved RMI's Conformant Downstream Facility status, following all the OECD guidelines and very engaged with customers on ESG issues.

The team at Jervois Global in conjunction with the team at Jervois Finland are working diligently on applying the same operational issues to all of our facilities, focusing on carbon footprint reduction, climate action strategy targets, participating in the TOCANEM, towards carbon-neutral metals program with Business Finland. And very importantly, the R&D staff at Jervois Finland is working on a number of projects that are aimed at increasing the amount, the percentage of the business that's involved in the circular economy, recycling spent catalysts and other materials.

And working not only at the plant at Jervois Finland but in conjunction with universities and suppliers and customers to make that happen in the future. Recycling is an important part of the business, and we look to make that more important in the future.

Next slide.

Thanks, Wayde. So just back on ICO, Idaho Cobalt Operations and São Miguel Paulista, here in Brazil, briefly.

So as I mentioned, I was at site recently in Idaho, heading back there in a couple of weeks. Construction is proceeding at pace.

It's exciting. We've opened the portal, and we are currently preparing the site for the winter construction season.

Here in Brazil in Sao Paulo, the study is progressing. We've modified the scope to look to optimize the commercial framework ahead of the 2023 restart and working with Ausenco and the team here in Brazil to move that along for our 2022 and Q1 study delivery.

Move to the next slide for James to close out.

Yes. Thanks, Bryce.

And look, this is an overview of our cash reconciliation for the quarter. And look, I won't dwell on all of it, it largely sort of speaks for itself, really sort of dominated by 3 key activities in the quarter or key sources and uses of the cash.

Firstly, to call out the CapEx at ICO. So we've continued, obviously, to progress at pace as Bryce just referred to, and we spent almost USD 8 billion on CapEx, progressing delivery of the ICO project through the third quarter.

Secondly, and sort of dominating the chart that you see on the page, we had a significant equity raise and really a dominant feature of our sort of early third quarter period with the funds and the consequent sort of outflow to acquire and secure the acquisition which we closed on 1 September. And thirdly and finally, just to mention, you'll see on the chart there as well under the ICO bond structure, so the USD 100 million senior secured bond that we issued to fund ICO, you'll see that sort of USD 15.5 million in the bar chart as well.

That's money that remains ours. But under the terms of the bond, we had to put that into the ring-fence sort of structure that we get back as we draw down or reserve for future interest payments in accordance with the bond terms that we agreed back in July.

So just to sort of pivot to really the right-hand side of this page, the 3 really transformational financing initiatives that have been significant milestones in the company's history. The equity raise.

I won't dwell. We referenced it a number of times and hopefully familiar to most on this call, but really significant in terms of how it transformed the company.

In terms of debt financing, as I just alluded to, we are expecting to meet our first drawdown of the senior secured bond later in Q4 as we work through the pre-drawdown requirements, including the requisite expenditure and other milestones that we anticipate heading through the course of the coming weeks. And then sort of most importantly, I think, in terms of the news that's sort of fresh out today, the Mercuria facility.

So it is a -- initially, it's a $75 million facility. It's secured against the Jervois Finland assets.

What is really designed for is for us to borrow up to $75 million, the lower of $75 million or 80% of the collateral that sits in Jervois Finland business that we've defined according to eligible inventory and receivables. And what that enables us to do is the working capital sort of rises and falls is to match that with proceeds that we'll have available from the loan.

And indeed, it enables us to, over time, if we wish to recycle a portion of those proceeds to upstream outside of Jervois Finland for use elsewhere in the group. So it really is across all dimensions, providing significant flexibility for us.

I think it's a testament to how we've taken a good stride forward with Mercuria further to our previously announced MOU with Mercuria some months ago. And look, probably just to sort of round that out, when we talk about sort of flexibility, this could just be the first phase.

We have agreed a mechanism within that facility that could increase it all the way to a $150 million limit in due course, subject to completing a set of further requirements with Mercuria and obviously subject to the collateral and the assets that we can secure that against in Jervois Finland. So I think just wrapping it up, on the corporate side, it's really all about delivering the finance to deliver our business plans and really providing us with that strength and flexibility to continue to stride forward as an organization.

Bryce, back over to you.

Thanks, James. We don't have the closing slide, but I guess I'd just note that given Wayde mentioned that we're currently sitting around $27.50 a pound in terms of cobalt.

We don't provide forecast, but the -- certainly from what we're seeing in the physical markets into Q4 and the 2022 contract mating season is underway. We're positive, quietly positive.

And I guess what I would say is, obviously, first month of ownership and partnership with our new colleagues in Jervois Finland, it's the middle of the night. Hence, the team that you've got on the call now.

Sometimes when you buy a business and you look under the hood, it's not quite what to expect. This looks good.

We've been there the first month, I've spent a number of weeks in Finland and again heading back there shortly and it's -- we're really excited to have the business of the caliber of Jervois Finland on board, and really excited about what the future is going to bring for us. And it's nice to have a tailwind in the context of the broader commodity market specifically as it pertains to how cobalt looks as though it's playing out coming into the next calendar year.

So I'll close there and open and see if there are any questions. Operator, please.

And welcome to the world of cash-producing companies. It's -- it's a big day for Jervois.

I guess, though, with that, Bryce, come scrutiny on the cash flows and the numbers. And I must have -- I'm a little surprised that the number in September was as low as it was.

And I guess, James, has talked about that, but more around the guidance for the full year. I think when the $20 million EBITDA pro forma guidance was given that was on the basis of a $20 a pound cobalt price.

And as you point out, with the cobalt price now at $27.50, you're still sort of essentially guiding us to a $5 million EBITDA number for the December quarter. Just -- to me, that looks a little low compared to what we might have expected.

And I'm just wondering if you can talk through -- talk to that.

I think there's a greater or equal than next to the $20 million. And so I think that's an important aspect to consider.

And we are -- I guess, the way that I'm looking about how we set ourselves up in equity markets, Andrew, is that we're conservative in how we run the business, and we're certainly conservative in how we manage and guide expectations. Now, obviously, we saw the impact in September.

There is a lag, the way the price has been through. And what I would say is we're confident that the $20 million guidance that we haven't updated.

So it's less -- we're not updating previous guidance. It remains intact, and we're confident that, that will be achieved.

Yes, sure. I obviously don't want to make a big deal out of the first month, but looking for some good numbers coming through and I agree with you, I think the outlook looks really positive.

A question for James on the financing. So with the SMP refinery, obviously, you've changed your approach slightly, you just started up at full scale rather than do the phased approach.

And have you got any guidance for us yet on how much all costs will be for that start-up? And are you now fully funded for that with this Mercuria facility that was announced today?

Yes. Look -- thanks, Andrew.

Look, we haven't provide an updated guidance in terms of potential restart costs or economics that will come when we publish the feasibility study, which is expected in Q1, 2022. But what I think we can say is that the Mercuria facility offers us significant financial flexibility.

And one of the attractive features that we negotiated successfully with Mercuria was the ability to not have those funds sort of exclusively ring-fenced within Jervois Finland and available for deployment elsewhere if we choose to do so. So look, I think we have to wait until we get to the feasibility study before we make -- really release any sort of hard guidance.

But I think what I'm really sort of pleased about is that we've got a really sort of strong tool in the armory to provide flexibility around how we think through funding for SMP or any other development activity.

I was just on the Finland, I guess, a timing issue around pricing and then putting those prices through. How does working capital play into that?

Are you able to alleviate some of those, I guess, lags and bumps around profitability with changes in price by managing the working capital in a different way?

Wayde, why don't you take that to start?

All right. I think we're already attempting to manage the working capital in the most efficient way possible, Sinclair.

I think the lag is just inevitable based on the way the contracts are set up with the timing in the quotational periods on the raw material purchases relatively different in some cases to the same for our sales contracts.

Okay. Okay.

So realistically, leave the working capital strategy the way it is and bear the intramonth volatility because over 6 months, it should ironed itself out. Is that the way I shut interpret the way you manage it?

Yes.

Yes. Sinclair, Greg Young here.

It is really just a timing issue between risk management, so matching purchase and sales together, that is what creates a little bit of a timing issue.

Okay. Well, I think we've covered most of the comments that I did want to make.

Thanks very much for dialing in. We are excited to be doing this and look forward to talking to you on a regular basis and updating you on the market and on the business in quarters to come.

Thank you.