ERAMET S.A. (ERMAF) Q2 2024 Earnings Call Transcript

ERAMET S.A. (OTCPK:ERMAF) Q2 2024 Earnings Conference Call July 27, 2024 3:30 AM ET

Company Participants

Christel Bories – Chair & CEO
Nicolas Carre – CFO
Sandrine Nourry-Dabi – Director, IR
Laurent Cicolella – Communications Director

Conference Call Participants

Julien Onillon – Stifel
Alan Spence – BNP Paribas
Maxime Kogge – ODDO
Nicolas Monfort – BNP Paribas

Operator

Welcome to the Eramet’s First Half 2024 Results Presentation.

I now hand over to Christel Bories, Chair and CEO of Eramet.

Christel Bories

Good morning, everyone, and thanks for being with us this morning for our half year results presentation.

I will start with the introduction and then we will review the financial performance and operational performance; and Nicolas Carre, our CFO, will take care of this presentation and I’ll come back with an update on the strategic roadmap and the conclusion.

So starting with some word with introduction, we delivered a good operational performance in the first half of the year with normal operating conditions in Gabon, a strong increase in production in Indonesia, and mining and grade optimization everywhere.

In term of financials, our intrinsic progress driven by organic growth and productivity has enabled us to weather a challenging pricing environment and to continue to invest for the Group’s future growth with a limited impact on net debt.

We have also taken a decisive step in our development in energy transition metals strategy with the commissioning of our first lithium plant in Argentina. Production will start in November and this growth driver will fully contribute to the Group’s performance from 2025.

And last but not least, we have started to deploy our new CSR roadmap, Act for Positive Mining with the first new steps, particularly in term of the employee social protection.

If we move to the financials, some words on them, the environment in term of pricing has been continuously depressed over the semester. We delivered an adjusted EBITDA of €247 million, including a strongly negative contribution of SLN of €109 million and we managed to deliver that thanks to a good intrinsic performance. This intrinsic performance of €260 million comes from significant growth of production in our key mining assets, plus 33% manganese ore in Gabon with a return to normal operating conditions, and plus 40% of nickel ore production in Weda Bay.

It’s also due to good productivity improvements and fixed cost reduction to cope with the difficult environment. Altogether, it had a positive impact of €87 million for the semester. The external impact has been strongly negative due to the continuous decline in prices, mainly in nickel, and to the fact that the sharp increase in price of manganese ore has not materialized yet in our invoicing.

Our cash flow for the period has been negative as a combination of low Weda Bay dividend distribution in H1. We’ll come back to that. Sustained CapEx pace due to our growth strategy in lithium and in Gabon and higher working capital due to higher manganese prices at the end of June.

Thanks to the conversion of SLN loans into equity earlier this year, our debt increased only by €97 million to €711 million leading to a leverage of 1.

The key event of the semester has been the commissioning of our first direct extraction lithium plant in Centenario, Argentina, becoming then the first ever European company to develop capacity to produce battery grade lithium carbonate at industrial scale. Production at Centenario is scheduled to start in November 2024 with a ramp up expected to be achieved by mid-2025. At full capacity, this plant will produce 24,000 tonnes of lithium carbonate per year and equip its equivalent to the requirement of 600,000 electric vehicles per year. And very important, this plant, because of the technology and the quality of the deposits should be positioned on the first quartile of the cash cost curve.

Very important also, we have started to deploy our new ambitious CSR roadmap Act for Positive Mining, few elements and I will not come back to the details of this roadmap that we have presented at the end of last year and beginning of this year. I would like to highlight few elements safety, which remains our first priority and on which we continue to improve leading the pack in the mining industry. We have a frequency rate during the first semester of 0.8, which is below our target of 1 and is more than 20% improvement over last year.

We also have developed the transnational employee representation body in 2023. We are the first mining group to set up such transnational employee representation and it’s called the Eramet Global Forum. And Eramet has signed the first agreement with all our social partners to set up common base of social protection worldwide for all our employees.

And last but not least, the Act4nature international has validated the new biodiversity target in the Group 2024-2026 CSR roadmap, and especially regarding the biodiversity, as I said, and it’s including a commitment of Eramet not to conduct any deep sea exploration of mining activities.

So I will stop here for this introduction and I will hand over to Nicolas Carre, our CFO, who will detail our financial performance.

Nicolas Carre

Thank you very much, Christel. Good morning, everyone. Thanks for being with us in this Olympic Day for France.

So I will indeed enter into more details of our financial performance for the first half and I will start with a couple of comments on these financial numbers. Christel was mentioning in her introduction the impact of SLN on the adjusted EBITDA, which is clearly an important impact. And I will come back to what needs overall for financials.

But also the other topic I want to highlight here is the impact of SLN on the net income because as you can see, it was indeed negative for the first time at minus €41 million for our share. But out of that €72 million is negative related to SLN. So this means that it was clearly driving down this performance and as we will see, it doesn’t have any more economic impact for the Group. So I think it’s really important to highlight.

The other topic, which has already been said by Christel, but still I would like to emphasize is the limited increase in net debt and the well maintained and controlled leverage in the context of both negative and I would say challenging pricing environment overall, and also in the context of significant investments that we continue to do, and I will also come back to that later on.

So I think it’s really to be emphasized the ability we have, which is the confirmation of the robustness of our business model, to keep a limited debt in challenging environments and making sure still that we can continue to invest.

Looking at more details of our performance, the thing I will, and we have already emphasized, but I will detail it a bit more in the coming slides is the strong performance, the strong operational performance we have had in the first half. As you can see, overall, we have generated an interesting performance in just the first half of €216 million versus the previous year. That is the first half of 2023.

Clearly, there is one thing which makes this possible is the fact that in H1 of 2023, we have been facing one-off logistic events in Gabon, as you may remember. And this is something we highlight here in the first half for plus €100 million. This being said, even that, so it means two things that we have been able to come back to normal. So what we said last year, that it was one of events is clearly the case. It remains one off and it will remain one off. So that’s the first thing I would like to highlight.

And the second one is that the rest of the performance has also been very strong, as you can see. If we move this €100 million, we still have a positive €116 million, driven by positive volume, especially out of Weda Bay, and also improvement of grade of our mining production both at Weda Bay and also GCO, primarily if we compare to previous year. And overall, the productivity and the management of its cost has remained very strong, as you can see.

And the last piece is a negative inventory variation that we have had out of SLN given the context faced currently in New Caledonia and I will come back to that later on. So that’s the same. Keeping in mind that this performance has been generated also including some negative effects coming out of SLN, which don’t have any more economic effect to our financials to the financing conditions of the Group.

In terms of external factors, Christel has been mentioning it in our introduction, so I won’t go into detail. And in any case, we describe a bit more the evolution of pricing later on in the presentation. One thing I would like to highlight is, we have here also a negative effect coming from the level of low-grade saprolite volumes out of Weda Bay. This one’s being indeed driven by the fact that we have not obtained the permitting for this portion, which is honestly not in our control. And we can see a positive effect on the other hand, in case in related also to the permits insurance process in Indonesia, leading to a situation of deficit currently unabling to get premiums on the price of ore in Indonesia. So that’s why both items, as you can see are reporting in the same box here.

And it’s — the other thing I would like to highlight on this topic is the fact that it’s not because we didn’t get the permitting in 2024 for this low-grade saprolite ore, that we won’t be able to get it in the coming years and that’s really something we’d like also to emphasize. And we’ll come to the overall situation of permitting and volumes on Weda Bay, on which we have some good news to share later on in the presentation.

Let’s keep moving and having a look on the netting terms. So I was commenting already the key item on this is the fact that indeed especially we are reporting a negative net income group share in the first half. But this one is including €72 million negative for SLN. So that’s something, which is very much to be taken into account, because this means that again if we remove economically something, which is not to be considered due to the fact that we don’t finance anymore SLN. In the context of very challenging depressed market situation, which will improve as we’ll come back to later on. In the second half, we are still able to have a slightly positive net income. So that’s something I would like to emphasize.

In terms of CapEx, we have continued our growth CapEx as it was planned. And that’s something which is very important even and that’s something we said when we presented the 2023 results and that’s something we are continuing and we wanted to continue for 2024 and we are continuing, as you can see here is despite this challenging pricing environment. We want to make sure that we prepare the future of the Group. So that’s the reason why you can see a maintained investment on the lithium front, very similar overall amount as H1 of 2023. It’s primarily the end of the construction of the first plant that Christel was mentioning in terms of highlights in the past week and we’ll come also later on to the future of this very important new business for the Group.

It’s also, and that’s something we shared openly also in our CMD and during the 2023 full year results presentation, we are continuing to invest in Gabon. So you can see the detail on the right side of this slide. We are investing both in the Comilog activity, the mining activity, and to be honest, it’s primarily also the investment on the railway, so the rail equipment to be able to transport the ore. And on top of that, we have been investing in the Transgabonese renovation program, as you can see for €37 million.

On the other side, and that’s something I was highlighting a bit before. We are keeping a stringent control of our current CapEx, as you will see and as you can see, it’s actually reducing, it’s in reduction versus what we spent last year in the first half. And we will see later on, we’ll continue this stringent management with the revision of the full year guidance, which is clearly a sign that we take also into account the current environment, even if it will improve in the manganese ore area and we are still having a strong control of our CapEx.

If we move to working capital requirements, we have an increase of the working capital, which is very mechanical. Christel was saying that we have not yet seen the full materialization of the increase of the index in manganese ore in the first half, which is true. I was adding fully because we have actually started to see an increase at the very end of the semester, especially in June. And mechanically, this drives to an increase of the receivables. So that’s the biggest portion of the increase of our working capital. That’s just the end of 2023, as you can see also, and it’s always important to compare to the same period of the previous year. Actually, we have a slightly — slight prediction of our working capital. So, which is a confirmation of what we have already said in the past, that when we talk about seasonality, it’s very often that in terms of working capital, the seasonality is negative. And we have a higher working capital at the end of the first half versus the end of the year.

And on top of that, as I said before, we have also the impact of the selling price of manganese ore, so no negative signal here. And it’s a clearly something, which will stabilize in the second half without any doubt.

Talking about net debt evolution. So we have already said that it’s a slight increase. So for €97 million versus the end of 2023, it’s by the way, and back to the same comment I was making on the slide before on the seasonality of our working capital. If we compare to June 2023, we are exactly at the same amount of net debt. So that’s something really to highlight given the environment in which we are concerning the market pricing.

The free cash flow, so when we look at the reported free cash flow, it is significantly negative because it is at €521 million negative. The reason why we talk about the economic free cash flow because we do believe it is important to highlight a few items which are not in the free cash flow, but which eventually are also explaining the limited evolution of our net debt.

The first one is the financing of the SLN needs and losses, so financing needs and losses. I will come back to that later on. So this is financed by the French state. So that’s why as everything is financed by the French state, and knowing that the negative impact is consolidated in our free cash flow, we feel important to provide the picture what it means removing it, knowing that this is not eventually impacting our net debt.

The second piece we like to highlight is clearly the Centenario CapEx to our lithium project in Argentina is fully consolidated in our numbers as well. And knowing that this portion, so 50% of it is financed by our partner Tsingshan via capital increase, capital injections into the subsidiary in Argentina. So this is the €85 million you can see here. So that’s the reason why we are really willing to keep following this economic free cash flow criteria, because this is according to us, the best way to look at the true generation of cash. In the first half, it was a consumption of cash. Christel was mentioning the two items in our introduction because we have had limited dividends out of Weda Bay in the first semester; it will improve in the second one. So that’s for sure, and that’s a first driver.

And the second driver is because we have invested in our growth CapEx, as I was detailing just before. So that’s overall the reason why we remain with negative economic free cash flow. But I think it’s important to look at the overall picture again taking into account the items, which should be considered out of — not really out of our control, but things which are reported and consolidated fully in our free cash flow that are financed separately by other parties.

So I was already detailing SLN before, but I think it’s important to make a slight pause here because it’s negative and pretty significant negative impact in a lot of areas of our financials in H1, mentioned EBITDA, mentioned net income, mentioned also free cash flow for €145 million. So that’s why it’s really important to point out the fact that all of it, something we said before, but which is confirmed fully again in the first half is financed by the French state.

I will try to show in this slide a pretty clear breakdown of what happened on this area in the last six months. The first piece is that as you may have in mind, we were in our net debt at the end of 2023, having the existing loans of the French state to SLN for €260 million. This has been converted, thanks to the agreement we found at the beginning of the year into equity instruments. So the undated subordinated bonds, which have been issued by SLN and fully taken by the French state, and this already has reduced mechanically our net debt.

Second piece which has happened is the financing of the needs of SLN in the first half. As you can see on the middle of this chart, this free cash flow, so the financing needs, the financing needs of SLN amounted to €139 million in the first half, and it’s almost fully equal to the financing, which have been provided by the state for €145 million. It confirms what we have said before, that this is now fully taken care of by the French state and the €145 million to be even more detailed, it’s €60 million financed by the French state in February. This was already disclosed in our previous communications.

Another €80 million financed in April. So that’s an additional information we are providing. The other €5 million is a capitalization of interest on the previously existing loans. So that’s how you have this breakdown of €145 million.

On top of that, we have, and I think it’s really also important to note SLN has obtained another financing for another. So it’s not the same amount. It’s the same amount. It’s not the same financing of €80 million in July. So, which is not for the past consumption, because, as I said before, it’s the same amount financing H1 versus the news of SLN. It’s to cover the coming needs in H2. So this is an additional confirmation about what I’ve said about the French state covering the needs of SLN.

And this is important because, given the context you all know in New Caledonia since minuet the performance of SLN has been extremely challenging from an operational standpoint, of course, and accordingly, from a financial standpoint. I really want to say here that we have a big source for the teams in New Caledonia who are doing an outstanding job to keep the operations running in this context. And honestly, even with this huge drop, being able to keep producing at the minimum level to keep the equipment running is a fantastic performance. This being said, and just to finish on that one, sorry, also want to highlight that it has been done in a very safe environment, which remains the priority of the Group, as also Christel was saying earlier, and which remains clearly our priority also in the current context in New Caledonia.

So this being said, clearly, even with this again outstanding performance from the teams, the impact on the operational criteria is huge with division by more than 3, 3.5 of zero exports in H1 2024 versus H1 2023. The strong reduction of ferronickel production from 24,000 tonnes to 17,000 tonnes, and accordingly, things can drop in EBITDA, because not only the production is challenging, but the pricing context is also challenging.

And here it’s actually pretty limited because there is also a fixed cost management implemented by the teams over there. And I’ve already mentioned the free cash flow negative. So just wanted to provide all these numbers because I think it’s important to understand our consolidated financial numbers.

But the message I really want to convey and insist on is that this is not anymore impacting our financing and economically, it does not impact and weigh anymore on our performance, which is very important to understand.

If I move to our debt maturity, so if you remember, last year, it was already an increase by a year versus 2022, and we have managed to further increase it by another year, moving from three to four. So — and I will come a bit more details in the next slide about the main driver. So the other thing I would like to highlight here is that thanks to that, we also keep a very strong liquidity. It was close to €3 billion at the end of last year. It is at €2.8 billion currently. So this is a confirmation that we have a very robust balance sheet, which also enables us to look at the growth potential of the Group with a lot of confidence. And again, we managed to do this in a very challenging market environment, which is a very strong performance. So the reason why we have extended the maturity, the main one is because we have issued our second SLB in 12 months, in May of this year. So it’s a confirmation of the new attractiveness we have to — it has been a very successful issue.

The order book, as you can see, was subscribed by more than 3 times. So, which is a very solid performance. And if we compare to our past performance in this area, it’s very something on which we have been very happy to see the attractiveness of our bond issue. And this is for €500 million, and it’s maturing this new bond. At the end of 2029, it’s a 5.5 years maturity. And this is the reason why we have this overall increase in maturity of the debt by one year.

And just a few words about the sustainability linked features. These are the same of the previous SLB we did in 2023 with a target to reduce our Gabon intensity by 37% by 2026 versus 2019 baseline, and also to have 67% of our suppliers and customers having the decarbonization target consistent with the well below 2 degrees scenario of the Paris agreement. So this is again very similar. It’s actually the same as the ones we — the same target as the one we included in our SLB in 2023.

Well, now to move to the operational performance of the Group. I won’t spend too much time on the first slide, which is showing the pricing environment we are currently facing. And it’s showing the continuous trend we have faced in H1 2024 on most of our products with one key exception. And of course, we’ll come back to that later on given the significant increased perspective it gives us for H2. It’s on manganese ore and to a lower extent, but still to an extent on manganese alloys.

Starting with manganese ore, following the announcement of our competitor in Australia in March, you have seen the significant increase of — you can see the significant increase of the index starting in Q2. And when I see significant increase, it’s almost doubling versus why it was in Q1. It has by definition given that it’s a conversion business, also paying effect on the manganese alloys indexes, which has been increasing, as I said before to a lower extent. This being said, it’s also to note because it was an inversion of trend, which has been very challenging for the last two years because it started to decrease in H2 of 2022.

And now we have seen this inversion of trend. The fact the manganese ore price is significantly increasing will have of course an impact of on the margin at some point in time. But currently, I think it’s important to note that given the lag, we have four to five months between the time the oil is purchased by our alloys plant at the time it is consumed in our cost of goods sold. So this gives a positive evolution of the margin, which is expected to last at least for Q3.

The overall operational performance, as we said before with Christel is coming from almost all our businesses. I will come into a bit more details afterwards business by business. But as you can see here, overall very strong performance. Production of manganese ore plus 33% versus H1 of 2023. Production of alloys plus 4%. So we could say a bit limited, but in the current market, it’s a clear strong production performance.

Nickel Weda Bay gain an outstanding performance, which is confirmed after very strong years 2021, 2022, 2023, because we managed to produce 58% more in H1 2024 versus H1 2023. As we said before, there has been however a negative impact in terms of external sales, which is coming from the low-grade saprolite on which we had vanishing to sell in H1 of 2023, which was not the case in H1 2024, as I said before. So that’s something to highlight, but it does not at all question our ability to produce, as you can see in our overall production performance. And as you will see in our confirmed guidance at least for the bottom end of the range, which should confirm a very strong increase of the production and sales in 2024 versus what we delivered in already a very strong 2023 year.

SLN I mentioned it before so I want to mention it again. And GCO, another very strong performance with an increase of 33% here also versus H1 2023. And in terms of sales, also very high with the plus 24% for ilmenite and 26% for SLN.

Manganese to start with a very important business unit for the Group. So an increase overall EBITDA as stated earlier, limited at this stage in terms of impact for the pricing, because it has just started to materialize in June, but a start of increase overall, the pricing was still slightly lower in H1 of 2024, that is H1 2024 — H1 2023. So this means that the reason of this increase of EBITDA is coming from the intrinsic performance primarily driven by the increased volumes I was mentioning in the slide before.

In terms of free cash flow, a limited improvement so far. I think it’s also good to highlight that the main reason why it’s limited is because of the working capital increase at the end of June that I was already mentioning. The fact that even if the price has started to pick up, it was at the very end of the semester. So it’s still now receivable. So this means that full free cash flow generation will be coming out of H2 and that’s something which will be massive, as we’ll mention later on.

If we talk about the performance a bit more in detail. So the transported volumes has seen at this stage a limited increase due to the lower seasonality related to H1. And especially that the wet season is taking place primarily in Q2 in Gabon. And this wet season was by the way pretty strong this year. So this is why it has been limited and also that’s something we mentioned at the beginning of this year. We want to ensure that we do the adequate maintenance work on the railroad to sustain the growth we have had so far and we want to continue to add on this business.

Overall though, and that’s something, which we want to highlight the cash cost has been very strong. It has been down by 15% versus H1 of 2023, reflecting higher volume sold. And by the way, it’s very close to the cash cost we reported for the year 2023 [Technical Difficulty] which again, given the fact that the seasonality is much stronger in H2 versus H1 is something which confirms a very high performance on our productivity, efficiency, and cash and cost management for this business.

The next point I want to highlight is the supply shortage from GEMCO in Australia that we have been mentioning a few times. This is very significant for the performance of our business because GEMCO represents a bit more than 10% of the overall manganese ore supply generally speaking, and it is close to 30% of the high grade ore that on which we are, by the way, playing. So this is a massive disruption. So we wanted just for the sake of illustration, show what will mean the current cash cost without the GEMCO volumes, which is the situation in 2024. So it shows that we are now by far the best place in this cash cost curve, which confirms the strong cash cost positioning we have been mentioning in the past. And this is what also enable us to generate so high margin for this business and even in a challenging pricing environment. So this means that here now we have GEMCO. The fact that the volumes would have to be compensated by high cost producers is showing the process side you can see here.

And this price upside has already materialized because the index, and that’s what you can see on the right-hand side of the slide, as I said before almost double versus where it was in April. So the fact is, if we look at the consensus, and this is something we have disclosed in our illustrative calculation of adjusted EBITDA based on the consensus of the analyst, it’s giving a consensus for H2 around $9. It’s precisely $8.9 per dmtu in the second semester. Very similar to where the index is today. So it’s not only, I would say, expectations, it’s today where we have and where we see the pricing taking place. And again, very much in line with the current cash cost curve.

So with that expectation, I also want to remind and Christel will come back to it in the perspectives that $1 per dmtu for us, given the volumes we are currently reaching means a positive additional EBITDA margin. So it’s pure EBITDA for €255 million for $1. Here, when we talk about an evolution of index, which was before in average, when I say index consensus, I’m sorry, before at $4.8, now it’s at $7.3. It’s an increase by $2.5. So it shows how big the impact is expected to be for performance in 2024.

I will not spend more time here. I was already explaining the manganese alloys, so pretty good performance in H1. And again, the current situation of margin has improved due to the slag between the time we purchased and the time we consume in our sold goods, the ore. So which is and which will show also interesting an improvement in margin. That’s something we could expect though an induction of trend likely at the end of 2024.

Let’s move to nickel. So we have had a very resilient contribution from Weda Bay, but in a clearly lower price environment. And I mentioned the fact that it was by definition lowering significantly the cash contribution to our free cash flow in the first half versus previous year. It really links also to the timing of the sales, which will improve in H2, as I said. So we can expect, and we are expecting for sure a much stronger free cash flow contribution in the second semester.

The other point I want to remind, I’ve said it before, but it’s always good to put a bit more emphasis on is the fact that in the current situation of deficit of supply, we can see Indonesia due to the delays in granting permitting to most of the producers. So we have seen an increase of the premium, it has already impacted for €24 million as I said before. Our performance in H1, it’s clearly much higher currently. So we are expecting a much stronger contribution also of that for the second semester. So that’s another good signal for coming financial performance.

Let’s move to the next slide, which I was describing already more or less in most details. The other information is that on top of the lower price coming from the LME evolution for the ore, we have also seen a reduction of the NCI prices by -23% versus H1 2023. So it’s a pretty significant drop. So that’s another explanation for the lower financial contribution of Weda Bay in H1.

Again, the point I want to highlight is in terms of production, it keeps to be a very strong success. We stated before, but 2022 was already — so Weda Bay was already the biggest nickel mine in the world. So 2023 was another 80% growth 8-0 versus 2022. And in terms of production, again, we have been able to generate another 40% of increase in the first semester.

Ending with mineral sands, so I said that it was a strong operational performance with plus 33% of production in H1. It’s explaining why we have been able to have a solid EBITDA despite reduction in selling prices as for the other market. So it’s more or less offsetting all the intrinsic performance we have in general as you can see on the right-hand side.

And the free cash flow is also lower because of the higher working capital, which is reflecting the sale of ETI at the end of last year. And by definition, it is now putting an additional working capital externally, which was before internally. And also the fact that we have had our first tax payment in H1 2024 for €50 million. So that’s actually the biggest impact related to the 2023 income tax and also for 2024 interim tax.

And to end up, so this highlights the HMC prediction again very strong in H1. And this also details the evolution of pricing, which has been negative in H1, which currently this being said, is slightly improving. It has slightly improved in Q2 versus Q1. So the negative trend has stopped for the time being, which is a rather reassuring signal. But overall, the main important message we wanted to provide for this business is a strong operational performance, which has been key for our success in the past.

So with all these details, I now hand it over to Christel for the strategic roadmap update.

Christel Bories

Thank you, Nicolas.

So in term of strategy, I will just remind you our strategic roadmap that you know well now, it’s aligned with the global macro trends. And these strategic roadmap has two pillars. The first one is to grow in metals supporting global economic development. These are the resilient markets of manganese ore and alloys of nickel for stainless steel and mineral sands. In all these markets, we have very strong position and very strong mining assets best-in-class and with a lot of opportunity for organic growth.

And we have a second pillar, which is to sustainably develop the critical methods for the energy transition. These are the fast growing markets of lithium for batteries also nickel provides for batteries and the hiking of those batteries. All this is supported by this ambitious CSR roadmap Act for Positive Mining.

So we have recently reached a significant milestone in our strategy to develop the metal for energy transitions with the conditioning of our first lithium plant in Argentina. As I said in the introduction, the production will start in November, and we expect to reach nominal capacity mid-2025. This is one of the most advanced DLE process, which has been developed in ours and is supported by 12 patents. We have been testing this process in a pilot plant in real life conditions, on the salar at 4,000 metals in Argentina for five years. So we have a very good knowledge of the process right now. The lithium recovery yield is at 90%, which is very high compared to our competitors, and which is triggering as a very good cost position of this plant.

The construction CapEx should be around €870 million. Expected cash cost between $4.5 and $5,000 per tonne of carbonate, which would be leading at nominal capacity to manual EBITDA between €200 million and €300 million, which is depending on the, of course, the long-term price assumptions for lithium.

On the next slide, you see this attractive positioning of this new plant. Here we have built an illustrative cash cost curve for the lithium industry in 2025. And you see that after reaching the nominal capacity, the Eramet plant should be very well-positioned and in the first quartile of the cash cost curve very first quartile. And it shows also the strong resilience of this discount to the low of the cycles, because you see the spot prices of today, which is not very high and much lower than the expected long-term price for the market. But you see that even with the spot price of today, we should be quite comfortable in term of cash position.

We have already planned to build a second plant in the North of the deposit. As you know, this deposit has large resources. We have certified recently 50 million tonnes of resources in the Centenario deposit. So we have already planned to build a second plant. This plant should have a production capacity of 30,000 tonnes of lithium carbonate costs around €800 million and with the same cash cost as the first one. It has been conditionally approved by our Board. But the construction is subject to some condition, especially the objection of the construction permits, which takes some time in the Salta province, and also, and importantly, to the implementation of the new investment fiscal regime for large projects in Argentina that should significantly enhance the economics and financing conditions of this new plant.

Beyond these two lithium projects in Argentina, we continue to build a portfolio of projects in metals for energy transition. In lithium, we pursue several opportunities in Chile. As you know, we have acquired a big mining concession in Chile covering a cluster of some of the most promising under developed — undeveloped, sorry, lithium salar in Chile. We are presently working with the state’s own companies, who are the holders of the permitting the lithium exploration and exploitation permits and we are working with them to develop the future projects on this concession. And we are also developing other partnerships. And we have signed in H1/2 farming agreement to conduct exploration activities in Chile on other salars.

In nickel, as you know, we have announced during the semester that we will not pursue the joint project that we had with BASF to develop nickel cobalt asphalt plant at the bottom of our Weda Bay mine. That being said, we know that Indonesia will continue to play a critical role in the future of the overall nickel industry. And Eramet continues to investigate opportunities to participate in the nickel value chain for electric vehicle in Indonesia.

And regarding the recycling of the nickel cobalt batteries in Europe, our project with Suez, we are continuing the feasibility studies. But given the considerable changes in Europe EV battery value chain observed over the recent months, we carefully assess the merits and the timing of when to proceed with this battery recycling project.

So as a conclusion, and it has been alluded to already by Nicolas in the operational presentation, we are entering the second half of the year in the context of favorable seasonality for our activities, combined with a sharp increase of manganese ore in the sharp increase in the price of manganese ore. The economic conditions remain sluggish at the start of H2 and especially with weak domestic demand in China. And the real estate crisis continue to wait on our markets. But the manganese ore supply significantly disrupted the supply market and providing support for the price upside as we have mentioned.

In term of manganese alloys selling price, we see price increase. But it’s just in line with the ore price which input cost increase. And we don’t expect the margins to be higher. And they remain under pressure because of the load demand, especially in Europe and North America. And we expect the price to stabilize in H2. So globally quite weak market conditions. But this manganese ore supply disruption provide an opportunity in term of a significant opportunity in term of pricing for the second half of the year.

In term of operations, as we said, it’s favorable semester for us in term of weather condition. And we always have higher production in H2 than H1. We are back from the beginning of the year to normal operating conditions in Gabon.

In Indonesia, our AMDAL, which is the environmental license, has been signed in July. So it will enable the parenting for Weda Bay retail sales of high-grade saprolite and limonite, for 2024, but also for the next few years because now the permitting in Indonesia is given for three years, which is good news. It also explains why it takes now more time. It has been taking quite a lot of time for many mining companies to get their firms this year because it’s given now for three years. So it requires quite a lot of attention for the administration. But we will — when we will get it — we’ll get it for three years, which is good news. And as I said, we will — we should start our production in Centenario in November this year.

So overall, we see further growth in our mining operations, as we announced at the beginning of the year. So the volume guidance for the year 2024 in manganese ore is between 7 million and 7.5 million tonnes versus 6.6 last year, so significant increase.

The guidance of production for the oil at Weda Bay is between 40 million tonnes and 42 million tonnes from 33 million tonnes last year, so it’s also a significant increase. We have reduced the top of the guidance — the top range of the guidance even previously, because we didn’t get the low-grade saprolite permitting this year doesn’t mean that we should not get it in the next year, because it’s something that is beyond the normal permitting and it’s given on an exceptional basis year by year. So it’s something that we didn’t get this year that we will apply for again in the coming years. And we should have, because of the start of the production in November, the production in Centenario should be very limited around 1,000 tonnes of lithium carbonate this year.

We have also lowered our CapEx guidance. It was €700 million to €750 million previously. It’s now between €550 million and €600 million. With gross CapEx between €350 million and €400 million, mainly due to the postponement of the start of the construction of the second plant in Argentina, we have not yet obtained the construction permitting, and as I said, we are waiting also for the new incentive package from the government. And we are also — we are very cautious regarding our sustaining CapEx. So we should spend this year €200 million versus close to €250 million in our previous guidance.

Overall, because of this huge increase in the consensus price, we have calculated indicative illustrative adjusted EBITDA, taking into account, I mean, this — the sensitivity that we have huge sensitivity on manganese ore price. I remind you that $1 per dmtu for Eramet means an annual impact on EBITDA of €250 million — €255 million, which is significant. So with the new consensus price that you see below here, and mainly for manganese ore, the main change is manganese ore at $7.3 per dmtu average for the year.

The illustrative adjusted EBITDA for the Group, taking into account our volumes assumptions that I just described should be between €1.2 billion and €1.3 billion for this year. So we are quite confident that we should have a very, very strong improvement in H2 versus H1 for two reasons. Again, this positive seasonality that we have in our volumes, the fact that we got our permitting in way that they and this significant increase expected and already not happening right now in the manganese ore price for the second half of the year.

So thank you very much. I’m stopping here and now I think we have time and I hand it over to Sandrine for the Q&A.

Sandrine Nourry-Dabi

Okay. So thank you, Christel. Thank you, Nicolas.

We will now start the Q&A session. We will take questions from our sell-side analysts first and then we will move to the questions from the people connected by the webcast. Operator, please, I hand it over to you.

Question-and-Answer Session

Operator

Thank you. This is the conference operator. We will now begin the question-and-answer session. [Operator Instructions].

The first question is from Julien Onillon, Stifel. Please go ahead.

Julien Onillon

Yes. Hi everyone, and good morning. I just like to come back quickly on the manganese market and we have seen obviously the big increase in pricing due to the problem of GEMCO. And what we have seen also, which was interesting with the potential big shortage is that a lot of small producers started to come back in the market and we discover that they had plenty of small inventory that they were able to provide to the market. The question is, they had some inventories, they’ve been able to provide that to the market quickly, which has made that the price has stabilized right now. But once those inventory will be gone, and normally has been gone very quickly. Could we see in the second half? I would, for the next nine months, because GEMCO will be at least will not export any ore for the next nine months at minimum. Could we see interim big rise of a new rise once those inventory has been — have been passed? And that’s one first of the questions. And behind that I have also the question about the inventories that could be done. And if you have a view on that, on the alloys producers, those have built inventory ahead of this big, let’s say shortage, low production. But also on the steelmakers, do we have some indication that they have buy in advance some alloys manganese, some alloys to make sure they don’t have any production problems. And that’s important because that will obviously have a major influence in the next nine months coming at minimum, I would say, and of course, it might also have an influence later on for 2035. So that will be my first question. I will have another question on the lithium market. We have seen the pricing quite low and table for the time being, do you see any, I mean, what’s your view about the short-terms of the market? Do you think that we could see another rebound, a strong rebound? We see effectively the cost curve, which could tell us that effectively a rebound is would come. But in the same time, it’s not something which is happening right now. Thank you.

Nicolas Carre

Thank you, Julien, for your questions. I would take the first one on manganese ore. So indeed, I think it’s an important dynamic of the market that you are highlighting the fact that at this stage we have seen the possibilities, especially of producers of semi carbonated ore out of South Africa being able to replace, to compensate the lack of the absence of production and export out of GEMCO.

This being said, and I think it’s also important to mention it and it will be a segue to your second question. The other thing we need to keep in mind is that overall the market in China, and also especially of construction in China, which is by definition leading very much, the consumption of steel has been pretty low since the beginning of the year, which is continuity of trend after 2023. So that’s why we have seen the stabilization of the index for the high-grade ore that we are producing and selling out of Gabon.

You may have seen also at contrary more reduction of the index and selling price for the semi carbonated ore. Because indeed there has been on this area, given the inventory which was available. And I combined with the overall situation on the market in China, more or less a surplus short-term surplus. So that’s why you are right, it could — this trend could actually change in the coming nine months. This being said, I think we need to be cautious because we cannot be sure about the overall evolution of the market in China. They have started to put some incentives, but not significant ones, last week.

And overall, we feel, and I think it’s important to remind the way we look at our illustrative calculation of adjusted EBITDA, which is based on the consensus. And we believe that this consensus, which is more or less at the current index for high-grade ore is pretty balanced. So could we see a slight increase? Difficult to say yes or no as of today, but it’s a possibility depending indeed on how long this shortage will last and also the evolution of the overall market.

Christel Bories

Maybe just to add, you have to understand that the manganese alloys producers, which are the customers of manganese ore. They have recipes for their mix, and they need to put high-grade ore in the mix. They cannot live only with semi carbonated ore. Usually, they put something like 35% of high-grade ore in the mix. Right now, because of the huge increase of high-grade ore and high availability of low-grade ore, they have changed the chemistry and the burden mix for some time between 10% and 20%, so quite low.

But you have to know that dropping at those levels create a negative value in use for them. It creates a furnace and stability, loss of power, productivity. And even if you go down, I mean, to 10%, it can even sometimes damage the furnace. So they cannot stay very long, at very low level of high-grade ore.

So today, they are right, and they took quite a lot of semi carbonated ore and they were available. But we think that they should be over time the need anyway, for high-grade or all these back to what Nicolas said, depend — will depend also significantly from the appetite of the market in China. But just to understand that there has been a kind of short-term opportunity to buy semi carbonated ore at a much lower price. But at some stage, they cannot avoid having some high-grade ore in their chemistry.

Nicolas Carre

And on your — so, yes, concerning manganese alloys, clearly there has been inventory, which was built in the plants, especially again in China, which is more than half of the consumption of manganese ore in the world. But this is something, which we have seen, and we are following very closely has started clearly to decrease in the last weeks. It was not that much given the possibility for some of the producers of semi carbonated, especially out of South Africa, selling and so shipping some of their available stock to the customers.

But clearly, it’s a continuous trend. And we expect that it will continue by definition. And it should actually further reduce by the lower availability of additional compensation from resources. And as Christel explained it very clearly, the compensation we could have seen in the past weeks between high-grade and semi carbonated cannot last too long. So this means that overall, at some point in time, there will in any case need to also slow down a bit their purchase of semi carbonated and so, which will have another effect on the inventory.

So that to complete, it was honestly, it’s an associated pressure in any case, because overall, the fact that at this stage, it’s also stabilizing the index is because there is an inventory effect, which has stabilized more or less, but it will continue to decrease in the coming months.

Concerning lithium, so — concerning lithium, there is indeed a pretty low price currently. We have seen some kind of EV, winter, that’s how it is called currently on the different markets. It’s what we believe is a short-term trend. At the same time, there has been new lithium production, new lithium supply coming into play in the beginning of the year. So, which explains that there is a current surplus on the market, explaining why, overall, the pricing has been slowing down.

I want to remind one thing is that even with the price around $12,000 per tonne currently with our expected cash cost below between $4.5 and $5,000 per tonne. We still have a very, very solid operation in business case. But our expectation is that this current surplus we see will decrease in the coming years. And we are still confident with what is the consensus of the nice for the long-term price, which is between $15,000 and $20,000 per tonne.

Christel Bories

You have to understand that the lithium market today is still a very small market. So the supply, each time there is a new production coming on stream, in term of supply, it’s a kind of step change in the market. So — and the demand is evolving more smoothly. That being said, the overall demand for lithium, and as you know, whether you put LFP or NMC, you need lithium anyway in the same range. So we expect the market to double every five years over the next 15 years. So it’s — there are some short-term effects, as you explained. And we expect the market to be in surplus this year and probably beginning of next year. But again, it’s highly depends on the dynamic of the Indian market.

And the only good thing I see of the price of today is that it has stopped all the fancy projects. There were projects pumping up, topping up almost everywhere with cash cost above $17,000 per tonne. And those projects today have stopped, have been mold [ph]. And I think it rationalized the market, the supply market going forward, which I think is good, because most of these projects were not economical.

Julien Onillon

Thank you.

Operator

The next question is from Alan Spence, BNP Paribas. Please go ahead.

Alan Spence

Thank you, operator, and good morning. Two questions on nickel. The first one on Weda Bay. The release notes some slowed production in one furnace in the first quarter. Was that driven by the lack of the saprolite ore, or was there some operating issues? And if so even has that been resolved? And then secondly, still on nickel, just on the outlook, you talked about an expected surplus in 2024. But I’d be interested to hear your views on how you think that surplus evolves over the next several years.

Nicolas Carre

Thank you, Alan, for your question. So I will answer for your first one. For the reduced production out of the one furnace, it’s actually maintenance, which was taking place on this furnace. So it’s more a short-term issue, which has been indeed impacting the lower cost performance, especially comparing to last year. So it’s really not the lack of ore. There’s been a continued supply of ore from our mine to our plan shared with Tsingshan on Weda Bay.

Christel Bories

Regarding the surplus, yes, there will be a surplus this year. And as you know, there have been a lot of capacity built, especially in Indonesia, especially in the ferronickel side. When you look at the SLN for the nickel source, it’s remaining at quite good level. What is quite low today is the price for NPI or ferronickel because of the significant capacity and also the fact that now the Chinese have registered their nickel metals to at the LME. So they can play with this capacity on all the different markets. They can produce NPI, they can produce mat, they can produce nickel metal, and they can produce also nickel source.

So now there is a kind of leveling in — on all these capacities. And the good thing is that the demand is still dynamic, when you look at the growth of the demand in nickel for stainless steel, so the basic production, stainless steel production worldwide has grown 8% in H1 2024 versus H1 2023, and the global primary nickel demand has grown 7%. So it’s a dynamic market. Yes, there is today a surplus, but I think also the price of today — the good thing of the price of today is that it is regulating a big capacity.

And you may have seen that in Indonesia. First, the government is not incentivizing any longer the construction of NPI plants. On the contrary, they tried to limit now the additional capacity because they have realized that they have enough now. And on the other side, the rest of the market is also adapting to this new supply/demand condition. And the least profitable capacity are closing down elsewhere. So we expect this surplus to, I mean to be rationalized and come to a balance in the coming years. But again, I think it will remain a very ferronickel part, especially will remain a very competitive market, we think in the short-term.

Alan Spence

Okay. Thank you very much.

Operator

The next question is from Maxime Kogge, ODDO. Please go ahead.

Maxime Kogge

Hey, good morning. So, two questions on nickel. The first one is related to your ambitions in battery grade nickel. So there was reports about a possible partnership with Huayou, which is a big a key player in that area. Where do you stand in that respect? Are you still intent on keeping a majority stake in such a project? And what could be the timeline for this project? And second is on the New Caledonia is nickel packed now off the table, or do you see potential for revival of this quite crucial pack to restore competitiveness in New Caledonia and further ahead in H2 or in 2025.

Nicolas Carre

Thank you, Maxime. So, for your first question, we’ll repeat what we have said after the decision to stop the Weda Bay project with BASF is that we are investigating all the options to be participating into the nickel industry in Indonesia for batteries. We confirm it. We want comment things you could have read separately, which is, I mean, not sustained some possibilities, which could be part of the options, but nothing else. So I want also comment if we would remain a major main shareholder, as you were asking, as it was indeed planned for Weda Bay because it’s really too early to say with what we are currently contemplating.

Christel Bories

In Caledonia, honestly, the situation, the political and social and societal situation in Caledonia is really unpredictable right now. Things are very, I would say, difficult to control. And the fact that we don’t have really a long-term governance in France and the fact that there are still a lot of disruption in social disruption and riots in Caledonia doesn’t help. So today, we don’t have any visibility. And honestly, it will take time to sit down around the table and rethink about the future of the nickel industry.

So the good thing is that it has no economic impact on Eramet any longer. As we have explained several times now over the last month, we helped SLN operating from a pure technical point of view, and we manage, I mean the safety of the people there. But honestly, from the political point of view and the future of the nickel industry there, I have absolutely no visibility and I think will not have any in the coming — in the very short-term in the coming weeks, it will take months.

Maxime Kogge

Okay. Thank you.

Operator

The next question is from Nicolas Monfort, BNP Paribas. Please go ahead.

Nicolas Monfort

Hello, my first question is on working capital. What do you expect for the full year impact? Are you going to be able to be stable or do you think you should have a negative impact in the full year basis? For my second question, it’s about manganese ore. You talk about €18 million mixed impact. Can you explain where it’s coming from? And — sorry, I have a third question. It’s about your low-grade saprolite. Do you expect to get an authorization to sell it in 2025? And what are you going to do with your inventory? Thank you very much.

Nicolas Carre

So thank you very much, Nicolas. So I will take the first one concerning working capital. So the first thing I would like to remind is that we have demonstrated in the last years that we are managing very strongly and very well our working capital, so optimizing as much as we can all the areas and especially inventory.

One thing clearly, and I would say it’s a good problem to have with the current expectation in terms of manganese ore price for H2 mechanically the same as what we are saying at the end of June with already an increase of working capital due to the start of increase of pricing in June, we are expecting if this materializes, and that’s currently our expectation.

We are expecting that it will impact the working capital up at the end of December. This will be a mechanical effect. Honestly, you can make quickly the math for that is we have usually a one month payment term for most of our activities and especially this activity. And if a price just to make it simply is at $9, it was closer to $4 at the end of 2023 for manganese ore. So it means that it will be a pretty substantial increase that we are expecting. Could there be way to further optimize it? Of course, we are always looking at the options to anticipate some payment from our customers, but realistically and reasonably, yes, we are expecting a non-significant increase of working capital again in this pricing context. But as I started to say, it’s a good problem to have.

Nicolas Monfort

Especially on that, don’t you — is it not possible to have an uptake agreement to ease your finance on this subject?

Nicolas Carre

So the answer is it’s always possible to contemplate an uptake agreement, but it’s never — it’s rarely adding value of role to a producers and usually you will do it. And we could consider it in a situation where we are really under significant financial stress. So I will not personally consider and advocate for this kind of option in a situation on which we have confirmed that we have a robust balance sheet with limited increase of the debt in the trending context we are facing in H1 as we mentioned before. And with the fact that even if I was answering specific to your question, should we expect an increase of working capital at the end of December, yes. But in any case, this means also that we have enjoyed significant generation of cash in H2 in this pricing context. So honestly, I will not consider and contemplate this kind of update agreement because it’s always a risk to discover value.

Christel Bories

Just quickly because we are running out of time on this question on the low-grade ore in Weda Bay. So this year we don’t expect to get it. We will reapply next year. The fact is that the administration in Indonesia, they have been quite slow and quite restrictive giving the permitting this year also, because now they are giving it for three years. So they are particularly careful and it has created the tension on the ore. That’s why we have premiums today on the ore for internal Indonesian ore price.

So we think that the market in Indonesia will need this low-grade saprolite in the future. So we will be able to sell them. And in the meantime, yes, it is in our inventories, because when you extract your high-grade saprolite and your limonite, you also extract some low-grade saprolite that you put in the inventory. We used to call that conservation ore because at the beginning of the production of the mine, we were not able to sell them. So it will be in our inventories. But we think that we’ll have, when the market is in tension, we will have potentially from time to time ability to sell this low-grade ore in the short-term and in the long-term, anyway, as the grade is going lower in Indonesia this “low-grade saprolite” will become normal sellable products. So we — longer-term, we should not keep these inventories at high level on our hands. But short-term, we won’t get the permits this year.

Sandrine Nourry-Dabi

Okay. So we are running out of time. So I suggest that we move on to the questions from the webcast. Laurent?

Laurent Cicolella

Yes. We have a few remaining questions from the webcast. First on manganese ore production, could you give more color to the small change to your guidance? And do you have flexibility if you decide to ramp up production of shipments?

Christel Bories

In fact, it’s mainly a transportation bottleneck. And we will do already a strong second semester due to the good seasonality. We continue to invest to renew the railway and we think it’s important to continue to do so. So we have some cuts during the week of the railway in order to do maintenance and renovation work. So we have very limited flexibility to increase our production beyond the range that we have given.

Laurent Cicolella

In manganese, do you have an indication of the current level of high-grade manganese inventory in Chinese port? And regarding cost, do you have an estimate of the marginal cost in manganese production in South Africa?

Nicolas Carre

So I will be very quick. So the estimation of high-grade ore inventory is around 1 million tonnes. So that’s for the first question.

And concerning the second question, so there is an estimated of the cost out of South Africa, it could be around 5.5 the rest of dmtu. I really want to emphasize the fact that part of the additional semi carbonated, which is currently available. So clearly it’s not a signal of what should be the price going forward. So there has been inventory available, which was indeed a bit impacting the business on the very short-term. But that’s so there will be a need, as we discussed earlier to get additional supply from a much higher cost producers, but to answer specific questions which are on 5.5.

Laurent Cicolella

And finally, will the manganese ore price increase impact your EBITDA in manganese low your business? And where do you see net debt at your end?

Nicolas Carre

Thank you. So, first question, I was trying to explain it in the course of the presentation. So short-term indeed, we are expecting it will increase the margin due to its primary accounting at Eramet. So the fact that as it takes four months to five months to consume what we purchase in terms of price. It means that the recent increase in selling price for manganese alloys will impact positively without having negative impact of ore consumption itself. This is something, as I was saying, we could expect to reverse after the first five months, like so, that’s really a short-term answer. So short answer, short-term, indeed, an increase expected. We have started to see that at the end of the first half and inversion of trend likely at the very end of this year.

And concerning the second question for net debt, so we are not providing any guidance, but clearly with the anticipation of the EBITDA, the illustrative calculation we give for the full year. So it tells what will be the potential generation of EBITDA for the second half, which by definition should lead to a substantial decrease of our net debt. So it’s not a precise answer, but I won’t give you the precise answer, but clearly you can expect that it will decrease.

Laurent Cicolella

And finally, could you give some update on your assessment of the geopolitical environment in Gabon?

Christel Bories

Yes. Globally speaking, I mean, it’s — we are connecting with the new authorities. And in Gabon for the time being, everything is going quite smoothly. So I think again, it’s a transitional governance. So we will see in the future how it will evolve. But for the time being, we are working with the new authorities and there is no impact on our activity in them.

Sandrine Nourry-Dabi

So the Q&A session is now over. Christel, one last word.

Christel Bories

Yes. I think that we — as I said, we are confident that we will have a second semester much higher than the first one. Again, because of the significant improvement in the seasonality of our activities and production increase for the second half, and also because of these opportunities — the opportunity in the manganese ore price that will materialize in the second semester and mainly in the weeks to come, and that has not materialized in our figures for H1 — so H1. So again, we are quite confident in much better second half of the year.

Sandrine Nourry-Dabi

Thank you very much, all of you, and have a good day and a good opening ceremony for the Olympic Games in Paris. Thank you very much. Bye-bye.

Nicolas Carre

Thank you.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.