Umicore draws capex flak
The European battery metals processor remains under fire despite reining in spending.
"Your Ebitda in this business is zero. Last year was zero." Chetan Udeshi, analyst at bank JP Morgan, while apologising for his bluntness, pulled no punches about the performance of the battery materials business of Belgium’s Umicore during the firm’s Q4 results call.
Adjusted Ebitda for Umicore’s battery materials group in 2024 came in at “close to breakeven”, somewhat proving Udeshi’s point. And he and his fellow analysts are concerned about Umicore’s continuing capex spend in the area, even though the firm has pulled back on its commitments.
As a whole, the firm cut its 2024 capex by 35pc year-on-year to €555mn ($578mn), “well below” a mid-year target of €650mn, although that figure excludes a €175mn equity contribution to the Ionway joint venture Umicore is developing with Powerco, the battery arm of German OEM Volkswagen. But while most of the reduction is attributable to the battery materials arm — where spending was just a third of the previous year’s levels — it remains the most capital-intensive part of the business, eating up €307mn of the total spend.
“The reduction in capex is primarily driven by battery materials, where we passed the investment in Canada and where we also maintained the investments in Europe and [South] Korea, in line with the long-term commercial agreements,” says Umicore CFO Wannes Peferoen. The firm decided in late July to pause construction of its Loyalist, Ontario battery materials plant.
A long-term supply agreement with Chinese battery maker AESC for high-nickel cathode active material (CAM) for the North American market, which had been slated to be served from the new Canada plant, was switched to Umicore’s plant in Cheonan, South Korea, owing to the postponement. But this has led to incremental costs that have displeased analysts.
“We are focusing with our capex expansions really on the existing footprint, so Nysa and Korea,” says Umicore CEO Bart Sap. Nysa is the first cathode material factory in Europe, beginning commercial production in 2022.
Cut further?
But while it aims to slice another 20pc off capex in 2025 to less than €450mn (although with higher Ionway commitments of €400mn), again mainly in the battery materials arm, analyst questions remain. “I appreciate you are cutting capex in battery materials, but [that] still implies that you are probably going to spend €200mn capex in 2025,” Udeshi queries.
“Where is that €200mn on battery materials being spent? Your facilities are firmly underutilised everywhere. So I am just curious why the capex is not even down more than what you are guiding to,” he continues.
“We decided not to continue to with Canada to really save significantly on capex because, there, we would have to spend big if we would have continued with that project,” Sap explains. “The consequence, of course, is that we have to repatriate the customer contract into Korea.
“That is really a strong proof point; it is really a success that we were able to do that. But, in order to deliver against this future customer commitments, we do have to debottleneck the plant in Korea. That is where… capex is going. And indeed, we are also still having some capex going into Europe to finish up the current footprint against our customer commitments,” he adds.
But, while Sap maintains that switching the AESC contract to South Korea is “in the spirit of filling capacity utilisation in line with our customer commitments”, Udeshi is unconvinced. The October 2023 agreement with AESC did not foresee the ten-year supply deal starting to 2026 and the analyst is concerned that its start date might be delayed by 18 months or even more.
As such, he does not buy that the South Korean facility needs immediate work. “I am just curious if you are starting to debottleneck the Korean plant when frankly, we do not even have any volumes. I am just curious why is there a disconnect,” he says.
“We do have capacity utilisation in Korea and then it is moving to a pretty good level in the years to come,” Sap says in defence. And delays in starting contractual deliveries should not impact the bottom line, he argues.
“We also have the take-or-pay provisions, which will protect our Ebitda profile,” the Umicore chief tries to reassure. “Can there be a longer period than 18 months in the ramp-up? Possibly, difficult to say because the outlook remains mixed. But again, we have put these strong contracts in place for situations like this, and we will utilise these contracts.”
Not alone
But Udeshi’s is not a lone voice. “On battery materials, when you were looking at all of the contracts that you have and where you wanted to place capex, was at any time there ever a consideration of actually exiting some of the larger contracts that you have, so that you can actually save more capex?” asks Geoff Haire, analyst at bank UBS.
“We have strong contractual contracts,” Sap replies. “We are building against these customer commitments.
“I also indicated at the mid-year that — while we still see the progression, of course, on that volume curve for the existing customer portfolio that we have — we continue also to look into further customer diversification. There is a continued interest in Europe also by Asian players. So, I continue to believe in that differentiating asset that we have here in Europe,” he adds.
JV focus
Investment in the Ionway JV, which would see Umicore become the preferred supplier of battery materials to VW with a production capacity of 160GWh by 2030, remains relatively more popular with analysts. “I understand [capex on] Ionway,” says Udeshi.
But Sap is acutely aware that patience is not inexhaustible on the project, which remains more than 18 months away from securing project finance targeted for the second half of next year. On three separate occasions on the call, he mentioned the strong or specific “guardrails” that will continue to govern spending on the project.
And he concedes that rising costs are already an area to which Umicore is paying attention. “We do see some inflation on this project, like many other projects, of course, within Europe,” he admits.