Umicore draws capex flak
During a recent quarterly results call, Chetan Udeshi, an analyst at JP Morgan, delivered a candid assessment of Umicore’s battery materials division, stating, “Your EBITDA in this business is zero. Last year was zero.” This straightforward critique underscores the ongoing challenges facing Umicore in a sector crucial to the global shift toward electric vehicles. In 2024, the adjusted EBITDA for the battery materials group showed minimal improvement, as it approached breakeven. Analysts are particularly concerned about the company’s ongoing capital expenditures (capex), even though Umicore has made efforts to curtail its investments in this area.
Umicore has announced a significant reduction in its overall capex for 2024, cutting it by 35% year-on-year to €555 million (approximately $578 million), falling well short of its earlier mid-year target of €650 million. Notably, this number does not include a €175 million equity contribution to its Ionway joint venture with Powerco, Volkswagen’s battery arm. The battery materials segment remains the most capital-intensive area of Umicore, consuming €307 million of the total capex. CFO Wannes Peferoen explained this decision, noting the need to focus investments primarily on existing facilities, particularly in Nysa, Poland, and South Korea, while halting construction of the much-anticipated battery materials plant in Loyalist, Ontario.
The shift in strategy has had significant ramifications. A key supply agreement with AESC, a Chinese battery manufacturer, was altered due to the construction pause, leading to additional costs as Umicore redirected resources from its newly planned plant in Canada to its existing facility in South Korea. Despite the rationale of optimizing resource allocation, analysts, including Udeshi, question the effectiveness of this switch, especially when Umicore’s existing facilities are reportedly underutilized.
Looking ahead, Umicore intends to further reduce its capex by an additional 20% in 2025, targeting less than €450 million (increased commitments to Ionway notwithstanding). Analysts remain skeptical about this approach, given the current operational challenges and the existing contracts. Many are curious about where the planned €200 million capex will be allocated when current facilities are not operating at full capacity, raising concerns over financial prudence.
Umicore’s CEO, Bart Sap, reassured stakeholders that the company must undertake certain expenditures to improve the operational efficiency of their South Korean facility and honor customer commitments. These expenditures remain essential despite ongoing delays in the ramp-up phase of their agreements, which Sap believes will not drastically affect the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).
Additionally, Udeshi’s perspective resonates with others in the industry who question whether Umicore should reconsider some of its larger contracts to conserve capital. Sap remains steadfast in his belief in the value of these contracts, pointing to ongoing demand and strategic interest from Asian partners in the European market.
While the Ionway joint venture seems to have garnered more analyst support, Sap recognizes the urgency surrounding the project, especially with financing anticipated to be secured by next year’s second half. However, as he highlighted repeatedly during the call, disciplined spending will be critical to navigating the rising inflation affecting project costs across Europe.
In summary, Umicore finds itself at a pivotal juncture. The company is making strategic adjustments to its investments in response to current market conditions and operational challenges. These decisions will likely play a critical role in determining its success in the evolving and highly competitive battery materials sector. As electric vehicle demand continues to grow, Umicore’s capability to adapt and innovate will be closely monitored by analysts and stakeholders alike.