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Good day, and welcome to the Allkem Limited September Quarterly Results Briefing. [Operator Instructions]
And finally, I would like to advise all participants that this call is being recorded. Thank you.
I'd now like to welcome Martín Pérez de Solay, Managing Director and Chief Executive Officer, to begin the conference. Martin, over to you.
Thank you, Paulie. And welcome, everybody, and thank you for joining us for Allkem Limited September 2022 quarterly results briefing. As usual, I will be providing an update on our business; and Christian Barbier, our Chief Sales and Marketing Officer, will be providing us with a market update.
Also joining us for the Q&A today is James Connolly, who has joined the Allkem Group 3.5 months ago as Chief Project Development Officer, assisting us in the development of our significant growth pipeline. We will also have Keith Muller, from Mt Cattlin, and Christian Cortes who is stepping in as Deputy CFO while Neil Kaplan is on medical leave to focus on his health.
Firstly, the lithium market remains robust, and we continue to navigate through global challenges while we remain fully committed to deliver an execution our growth pipeline. At our operations, we continue to produce consistent and quality product at Olaroz. And at Mt Cattlin, we successfully implemented mitigation actions to increase mining capacity.
At our development and expansion projects, we have progressed construction at Sal de Vida, permitting at James Bay, resource extension drilling at Mt Cattlin and commissioning activities at Naraha. At Olaroz Stage 2 we have successfully reached over 33% completion. However, we have been advised of some delays to manufacturing and delivery of some key final components. So we expect to commence pre-commissioning in the December quarter. Full commissioning will occur in the March quarter, and first production will be in the June quarter of 2023.
We continue to be in an extremely strong financial position. This quarter, we generated group revenue of approximately $299 million and achieved a significant group cash operating margin of 82%. Group net cash at the end of the quarter was $447 million, and our teams remained focused on advancing the development of our project pipeline, as we have clearly stated, to triple production by 2026.
While being in a position of financial strength with significant growth assets that will also contribute to significant revenue generation, we are advancing 2 opportunities that are subject to due diligence and final approvals.
The first is a strategic deal to acquire the Maria Victoria tenement located 10 kilometers north from our Olaroz facilities while divesting in our Borax operations. The acquisition complements our existing extensive line lithium holdings in the region and will allow more efficient development of the Olaroz Salar.
The second is a proposed $200 million project finance facility with the IFC for Sal de Vida Stage 1. We saw an opportunity to further improve the financing structure for Sal de Vida and partner with IFC, an institution with decades of experience providing finance and sustainable business solutions in the mining space.
Sustainability, one of the core pillars of our business. We continue to be recognized for our leading practices and endeavor to increase our transparency and performance across our operations.
Allkem recorded a 12-month moving average TRIFR of 1.9 at the end of the September quarter, a 27% improvement from the prior quarter, and a 12-month moving average Lost Time Injury Frequency Rate of 0.5, representing an ongoing improvement trend in both metrics. Unfortunately, we did incur in 2 recordable injuries, one in Mt Cattlin and one at Olaroz, but both have made full recovery and returned to work. Preventive actions have since then been implemented.
COVID-19 cases at operations have significantly reduced as the impact of the pandemic across operating jurisdictions also reduces. Accordingly, we have minimized biosecurity protocols, and we will closely monitor the situation should we need to swiftly enforce them again.
We continue to maintain regular and positive engagement with all the communities we work as we develop on the construction activities -- as we develop our projects and the construction activities advance.
Moving on to our operations. Not -- in Mt Cattlin, not too long ago, we revised the full year '23 production guidance at Mt Cattlin due to labor shortages in Western Australia causing delays in exposing the main ore body, coupled with temporary fine grade mineralization. As mentioned, we have successfully implemented a number of improvement programs with the addition of magnetic separators, a larger mining fleet, an additional mining contractor and implementation of retention programs. Mining capacity has successfully increased to 1 million BCM by the end of August compared to 750,000 BCM in the month -- in the prior months.
In the prior months, 2.1 million BCMs of material was mined in the quarter and includes a record breaking of 872,000 BCM in the month of September. During the quarter, 17,606 dry metric tons of spodumene concentrate was produced at a 5.3% lithium oxide grade. While we do expect a softer first half of this financial year, we do expect production to pick up in the second half of the year.
In terms of sales, we shipped 21,215 dry metric tonne and generated revenue of $106.7 million with a gross cash margin of 84% based on cost of production and average pricing of $5,028 per dry metric tonne CIF for SC 5.3% (sic) [ 5.4% ]. An additional $35 million of revenue was generated from sales of 59,326 dry metric tonnes of low-grade spodumene concentrate at approximately 1.3% grade.
The resource extension drilling at Mt Cattlin progress as well. And at the end of the quarter, we have achieved 92 holes with a total of 22,000 meters. We intercepted high-grade zones with large thickness and in the first phase of the drilling, which is targeting the conversion of resources to reserves. In the second phase, assay results demonstrated the extension potential to the north of the current pit. A consultant has also commenced work on the open pit cutback feasibility study, which will aim to restate the mineral resource estimate and ore reserve.
Moving on to Olaroz. Quarterly production of 3,289 tonnes of lithium carbonate was achieved, 43% of which was battery-grade material. Production was up 17% from the prior corresponding period due to good plant performance from outstanding mechanical and reliability and asset utilization. Lithium carbonate sales were 3,721 tonnes, generating record revenue of $150 million with a gross cash margin of 89%. Excluding shipments to Naraha, third-party sales were completed at $43,237 per tonne on an FOB basis.
By the end of September, Olaroz Stage 2 expansion had reached overall physical progress of 93% completion. All evaporation ponds were complete and commissioned. Line 3 plant is now fully commissioned. Pre-commissioning and commissioning of lime plant 4 components is underway, and final construction activities are expected in the December quarter. Soda ash facilities with commissioning currently being undertaken. The carbonation plant has reached 77% completion. All activities in the carbonation plant are progressing to plan other than the delayed piping and electrical equipment, which we have recently been advised about due to manufacturing and supply chain constraints.
Pre-commissioning activities are still scheduled to start in Q4 calendar year '22, with commissioning activities starting in Q1 calendar year '23 and progressing to Q2 calendar year '23. The start of production -- there was a mistake in this paragraph, I'm sorry. I will read it again. Pre-commissioning activities are still scheduled to start in Q4 calendar year '22, with commissioning activities starting in Q1 calendar year '23 and progressing through Q2 calendar year '23. The start of production will now occur in Q2 calendar year '23.
As mentioned before, we are navigating through global challenges, including inflationary impacts and supply chain constraints. A recent review of Olaroz Stage 2 capital expenditure has been completed, taking into account the revised completion date and impact on logistics and freight. It is expected that capital expenditure will increase by around 12% to approximately $425 million. This still represents very competitive capital intensity of $17,000 per tonne and the increase will be funded through operating cash flow.
Additional capital expenditures for James Bay, Sal de Vida -- additionally, capital expenditures for James Bay and Sal de Vida remains subject to the same inflation and supply constraints as all projects are experiencing globally. We will continue to review and monitor these projects as they progress.
Moving on to our development assets that underpin significant growth. Allkem commissioning activities at Naraha continue including kiln heating and technical-grade lithium carbonate from Olaroz have been introduced in the main processing area. We remain on track for first production in the December quarter.
At Sal de Vida, we have made strong progress since construction commenced in January this year. We have focused on commissioning the first string of operation ponds and commenced the construction of the carbonation ponds for Stage 1 by the end of this calendar year. Construction of the 2 strings of ponds has reached 65% completion with the first 4 ponds completed and filled with brine.
The main brine pipeline is complete, and the first 3 wells have been commissioned. The procurement process has advanced to the final stage for the process plant and network have commenced. We have also advanced detail engineering for Stage 2, an additional 30,000 tonnes per annum to allow development to occur sequentially after Stage 1.
At James Bay, we are advancing the project on a number of fronts in anticipation for construction commencement early next year. Hydro-Quebec has completed detailed engineering of the power line, and substations have commenced preliminary site works. Detailed engineering continues alongside procurement activities, including awarding key equipment packages.
JAC, the Joint-Assessment Committee, a committee of Cree and Federal government representatives, published the draft environmental asset report for the project, and we commenced the final consultation period that will conclude in November. The clarification process with the Cree nation and provincial government has also advanced, and positive engagement continues with community stakeholders. Additionally, we are targeting commencement of 15,000 meters -- of a 15,000-meter drilling program to test extensions of the ore body.
I will now hand over to Christian Barbier, who will provide us the sales and marketing update.
Thank you, Martin. And good morning, everyone. We continue to see a very strong lithium market with both customer and market demand significantly outpacing supply. Supportive government policy for the EV battery supply chain continues to be further enhanced with significant U.S. tax incentives on offer as part of the Inflation Reduction Act recently passed by U.S. Congress. But stakeholders have progressively taken the measure of its very significant potential and implications over the last few weeks. Several large investments have been announced following the bill.
On top of this, this week, so an unprecedented amount of $2.8 billion worth of government grants awarded by the U.S. Department of Energy to critical raw material and EV battery supply chain projects. Further funds are expected to be deployed in the future, which will continue to drive demand and localization of critical and battery raw materials, including lithium.
Despite global challenges and fears of recession, EV sales in all major regions continued to be robust. Chinese EV sales figures in September reached 675,000 units, up 7% month-on-month, marking a historic record high. EV sales in China for the quarter were estimated at 1.9 million units, representing 107% increase from the previous corresponding period. Both U.S. and European EV sales for the quarter also recorded a positive strong growth, up 44% and 3%, respectively, from the previous corresponding period.
Despite increased exports of spodumene concentrate to China during the quarter, had a modest increase in Chinese lithium chemical production. Lithium supply continues to fall short of demand growth, resulting in a noticeable decline in inventory levels across the supply chain. Spot prices for lithium carbonate, lithium hydroxide and spodumene concentrate all rose during the quarter with new record high prices set for each. And Allkem's weighted average selling prices during the quarter, both for spodumene and lithium carbonate, reflects this environment of higher spot prices combined with the inertia built in from our contract book and the lag between price setting and invoicing.
Thank you. I will now hand back to Martin.
Thank you, Christian, and I will now hand back to the operator to commence the Q&A.
[Operator Instructions] And our first question comes from the line of Rahul Anand from Morgan Stanley.
First question. Look, the production was indeed very strong, so congratulations on that, especially year-on-year given seasonality. My question on that was really around the cost side and the sourcing of brine. So was there any Stage 2 brine used in the production process this period? And then if we look at the cost, what kind of cost pressures are you seeing on the ground in terms of fixed and variable costs? That's my first question. I'll come back to the second.
Thank you, Rahul. Brine, mostly for the period, was coming from Stage 1. Stage 2 brine, as we have been explaining through all the different calls, the ponds have completed to be filled in for Stage 2 in the previous quarter. So we are still cooking the brine for Stage 2. That shall be available for Stage 2 in the first quarter of next calendar year.
With regards to costs, and I will ask Christian to answer to your question that he's more into the details of fixed and variables.
Rahul, the cost pressure that we've seen on the variables is probably consistent and remains at a similar level that we saw last quarter. That is with regards to key raw materials that we use in the processing stage. So I guess high pressure there remains relatively the same.
With regards to fixed costs, that's probably the main problem at the moment since inflation in country continues to exceed the depreciation of the local currency, so that means that we're seeing an increase in labor costs in U.S. dollar real terms.
And Christian, in terms of the split being fixed and variable now at site?
Well, we've usually talked about something like 60% variable, 40% fixed. Now considering the element around devaluation and inflation, you're probably seeing a swing of 2 or 3 basis points the other way around.
Understood. Okay. Second question, look, in terms of the Stage 2, firstly, thank you for giving the clarity around CapEx and also including the working capital within that estimate that you provided today. But looking at the estimate itself, obviously, an additional $45 million and then the previous update was in December '21, which was an additional about $50 million. So we're looking at roughly around a 30% CapEx inflation from the start. So my question really is, about the rest of the portfolio, should we expect a roughly 30% level of inflation in the rest of the portfolio? And then in terms of the funding of that, anything about $330 million, will that be funded by you through shareholder loans as you've previously indicated a while back?
Couple of things. Thank you, Rahul, for your question. Many answers to a long question. Number one is the number is on the same basis as the previous one is excluding VAT and working capital.
Number two is, yes, yes, you can calculate that 30% number of capital increase that you referred to. However, you have to take into consideration that, that number includes an almost 24-month impact of COVID during which the operations were limited on the expansion. Not many works could be completed, and the cost escalated significantly as a consequence of all the COVID situation.
So when I look at the total CapEx for the project, taking into consideration that it took a lot longer given COVID and that there was a global inflationary period that impacted the last 12-month figures quite significantly, and disruptions in the supply chain as we are seeing are still considered that a $17,000 per ton capital intensity is quite a competitive cost for putting together a project in such difficult conditions.
The 30% number is -- that you mentioned is correct. But if you look at it, you have to consider that it includes all of the COVID disruptions that all the projects have suffered. So I think that if you look at the number based on the 12% that we're announcing from the previous update, mostly reflecting what Christian was mentioning of local inflation being higher, larger -- longer commissioning period and longer-term costs and other costs that James can provide you with more detail on. James, please, if you can complement what I have just said on that.
100% Martin. Rahul, good question. The latest 12%, yes. 30% of that is associated with the delays, and we can speak to those delays in terms of supply chain issues we faced. 25% of this latest increase is a cross inflationary and the Argentine context around the FX. Because we've been driving schedule, it's obviously quite beneficial for us to move this project quickly. We did see about a $3 million to $4 million increase in freight and then 40% on bill of quantities, and that goes back to our original estimate in the early days, and maybe that addresses your question. So $20 million of this cost was around just the engineering estimates and the bill of quantities that we had initially.
So no, I don't believe 30% is correct across the entire portfolio. Are there lessons we can learn in the supply chain crisis? Yes. Can we reduce this number going forward? Of course, we can. So we'll be looking to manage that strongly going forward.
Now, look, given circumstances, I think you have done a great job in terms of getting it up and running. Sorry, Martin, please go ahead.
No, last part of your question regarding the funding. The funding of this additional cost is from the operational cash generation, which is from Olaroz Stage 1. So we have positive cash flow generation there that has been devoted into the expansion project.
Perfect. Look, last question is just on battery grade split. 43% battery split in terms of production. Are you able to provide a sales split as well?
I'll drive that question to Christian Barbier. Christian, if you could talk through that, please.
Yes. So Rahul, we sold 40% of our cabinets during the past quarter in battery-grade cabinet. And the rest, 60% was technical grade. Is that your question? Sorry.
Yes, it was. Yes, I was just trying to arrive at sort of how I should be thinking about pricing. So I was just trying to get a range of how the pricing has gone.
Your next question comes from the line of Lachlan Shaw of UBS.
Oh, sorry. It's actually Kate McCutcheon at Citi. I think you've introduced me incorrectly. Mt Cattlin recovery of 25%. Is this for all the ore? I think last quarter, you'd said 53%, 57% recovery expectations for the FY. Did the material not perform to expectations? And what is the recovery expectations for the rest of the financial year for guidance?
Thank you very much for your question. I will ask our expert in Cattlin, Keith Muller, to answer that.
Thanks for your question. No, this recovery we experienced in the quarter relates to the quality of the feedstock we are processing at the moment. So the feedstock has a very high level of contamination in the form of [ Basel ]. So our expectations is that as we pre-strip the northwest pit and get into the bulk of the ore body that these recoveries of 25% will go away and will revert back to the sort of approximately 55% to 56% metal recovery once we're in clean ore. So this is just a temporary inconvenience we're suffering at the moment.
Okay. And so just to confirm, I've got this right. September quarter annualized is half year guidance. And you expect to make up 30%, 40% of the guidance in 3Q, 4Q, which would imply 2 record quarters, I think. And so that would imply a huge volume of ore milled at that 0.9%-ish grades. What milling rates are you looking in those last 2 quarters or perhaps for the next 3 quarters to that guidance?
Sure. Just a correction on production per quarter. The record production was in the March quarter 2021 of just over 60,000 for the quarter. So what we are looking to do in the second half is 50,000 in each quarter, so still short of record production of previous years. So what we are looking to mill for that period in H2 is approximately 900,000 tonnes of clean ore, which will produce approximately 100,000 tonnes of spodumene concentrate for the half.
Okay. That's helpful. And is there still more low-grade stockpiles to process there? Is there another 60,000 to go?
There is more low-grade stockpiles, but it is not our preference to process the low-grade stockpiles. Our preference is to process export clean ore. So as this ore presents to the [ ROM ], we're transitioning as quick as possible and delaying that low-grade processing and just focusing on the export ore.
Okay. So should we assume any revenues next quarter from that low-grade stockpile?
The quarter we are in, yes. As we guided last quarter, we were looking for 100,000 tonnes of low-grade sales, of which we've done just over half now and when we haven't made any firm commitments for the second half of low-grade material just yet. So I think we just want to stress that this is a temporary measure to supply lithium units to our customer. This is not a long-term strategy. The minute we can go back on spodumene of high volumes, we'll do that immediately.
Okay. And final question, perhaps for Christian. So battery grade production a bit over 40% in Olaroz. Can you talk to what you're seeing from customers? Is the demand for technical grade reflective of the LFP cathode manufacturing? Is the plan still to produce mainly battery grade? Any kind of color or commentary you can give?
So yes, thanks for your question, Kate. The production of carbonate and hydroxide, I think, in the market in China, which by far is the largest producer, has been affected in August with the power rationing in Sichuan, and it has recovered in September. But despite the pickup in production, inventories have continued to decrease for both carbonate and hydroxide and both for technical and battery grade. Obviously, it is for battery production, most of the demand, but people are upgrading technical grade into battery grade.
So our increase in technical grade shipments during the past quarter was really due to the requirements to feed Naraha for the commissioning. And we -- this is obviously a material that will be -- on which added -- value will be added as hydroxide is produced, and we will be capturing that value going forward probably more next year.
Yes. And so I can see you've got the separate split of pricing there. What were the tonnes that went to Naraha?
Look, 60% was technical grade, and probably about 2/3 of it was going to Naraha during the September quarter.
Your next question comes from the line of Al Harvey from JPMorgan.
I just want a bit more clarification around the low-grade spot sales. So is the additional 60,000 tonnes you mentioned in the release on top of the 130,000 tonnes you guided in FY '23? Or is that still part of it? And just is that $500 a tonne price you mentioned last quarter still kind of the working assumption we should model on?
Al, this is Christian speaking. Thanks, Martin. Yes, Al, well, look, again, I think we mentioned this. And as Keith indicated, this is a campaign initiated to supply additional lithium units to our spodumene customers. We have supplied about 60,000 tonnes of these low grades during the September quarter. We'll be supplying another 60,000 tonnes during the December quarter.
In terms of price, look, we had a slightly higher price than what you mentioned during the September quarter because the grade was a bit higher. The price we will obtain during the December quarter will depend on the grades that we ship. It is likely to be a little bit lower than what we had in the September quarter but certainly in line with what you're saying.
And I guess just following up on the finer spot grades, finer spot distribution, has there been anything in the recent resource drilling that's kind of given you indications of whether that's going to persist? And then what options do you have if it is a bit more prevalent than you expect? Is there any options for a float or fine circuit down the track?
Thanks, Al, for your question. So the fine-grained spodumene we intersected towards the end of the last financial year in the first month or 2 of this quarter has now disappeared. All the ore that we've processed in the last 9 weeks or so didn't contain any fine-grained spodumene, so it would appear that we won't be intersecting any more of that.
In terms of the resource drilling we've done to date, the 22,000-odd meters we've completed has all been RC drilling. We're now in the process of mobilizing a diamond rig to site to do further core holes and do a met test work on that, but we don't anticipate for that to continue.
But to answer your question, is there optionality for us to be in a position to process fine grained in the future, absolutely, we are considering many options of beneficiation of finer grade material as well as tailings. So we are in the process of conducting some test work under a number of beneficiation options to upgrade both potential fine-grained materials should we intersect it in the future but also to process historic tailings that we have in stock.
Great. And maybe just to round it out, I guess just thinking about those longer-term options for Mt Cattlin, are you able to provide the timing for the feasibility study on the open pit cutback? And is there any options around underground still there? And you've already mentioned that tailings is still on that, potentially an option there, too.
Sure, Al. So in terms of timing, our mineral resource update will be done by December, following the completion of the diamond drilling just to make sure that, that conversion to reserves are solid. Then the feasibility study will be completed in March. And if we have FID on that, we're looking to start doing the pre-strip of that open-cut expansion in April next year.
In terms of underground, this is within the $900 shell as we reported before. We are evaluating as part of this feasibility a $1,200 and $1,500 revenue shell as well. Unlikely that, that will be an open cut. What our intention is, once we finish the feasibility study for the immediate expansion of the Stage 4 pit, we will immediately commence a feasibility work to look at underground options and then do that trade-off analysis towards the end of the next calendar year to enable us to make decisions on what we will do beyond Stage 4.
The next question comes from the line of Reg Spencer from Canaccord.
Just one question for me today. What does the delay at Olaroz 2 mean for the provision of volumes to Naraha and your overall pricing? If you can help me out on that one, please.
As we have discussed in the previous quarter, Reg, thank you for your question, we have not guided any production for Olaroz Stage 2 because it was going to be part of the ramp-up process, so it doesn't mean significant changes to our forecast of product volume to Naraha nor to changes, dramatical changes, in the pricing that we will face due to the delay.
Okay. So what you're doing now is providing some share of volumes to Naraha that, that will just continue until such time as Olaroz 2 is up and running.
Exactly.
Your next question comes from the line of Joel Jackson from BMO Capital Markets.
This is actually Alex on for Joel Jackson. My first question is, so it looks like spodumene concentrate 6% is trading around $7,000 a tonne. But it looks like in the quarter that just passed, you guys were getting $5,000 a tonne for 5.4% spodumene concentrate. So the drop seems a lot more there. Could you maybe provide some color on the gap in pricing? Does this maybe have to do with the contracts being locked in earlier?
Christian?
Yes. Alex, again this is Christian. Look, the prices that you mentioned are prices that come from auctions on online platforms, which are excellent discovery prices. They reflect the pure spot situation for marginal volumes and at marginal prices and with limited-sized spot-ons. This is not representative of the overall market for spodumene concentrates.
Average selling price during the September quarter was slightly above $5,000 for 5.4% Li2O, which corresponds to about $5,600 on an SC 6% basis. So that was marginally above our June quarter prices. And as you said, it's mostly because we have a lag in pricing. We negotiate prices from one quarter to the other and also because we had some tonnes from the June quarter that rolled over into the September quarter. So we expect the December quarter to be in line with the September quarter with probably a slight improvement on prices. As you hinted, all our volumes are contracted and do not follow the reference of a very small spot-ons that are communicated to the market.
But if you look at the weighted average price that we extract for our spodumene concentrates, you probably will see that it compares quite favorably to that of other peers that publish their data.
I appreciate the color. And just a second question, what does the ramp look like for Olaroz Stage 2? How long would the ramp-up be to get to full production or full capacity?
Thank you for the question. We are maintaining what we have said before. We are expecting a ramp-up period in Olaroz 2 approximately 18 months. We're starting from a much better plant than Stage 1. We have assembled the commissioning team about a year ago, so we expect that things would go better. But we are being conservative as to ramp-up, and we are not changing what we said and what we have been saying regarding the project for quite some time.
Your next question comes from the line of Kaan Peker from Royal Bank of Canada.
Can you hear me?
Yes, Kaan.
Yes. Just on Mt Cattlin, just wondering how the pre-stripping was going, and should we expect further pre-stripping in FY '24?
Keith, can you please answer that question?
Sure, Martin, thank you. Thanks for your question, Kaan. Pre-stripping is progressing well. We had a record mining volume in the September month of 870,000. That beats our previous best, which we achieved in November 2021, of 760,000 bcm, which was just before the WA border closures with the rest of Australia.
So for the quarter, we will be mining approximately 2.7 million bcm. And again, on the same quarter, last year this time, we mined 1.9 million. So that's a 40% increase in mining volume on a quarter-by-quarter basis. So we do expect the pre-strip to continue into 2023, especially as we do the feasibility work on Stage 4 expansion. We envisage that this volume of material will continue to be moved for the foreseeable future as we potentially go into a further cutback situation.
Second question, on initial production from Olaroz Stage 2, the brine, I think Martin had said, is currently cooking. Just wondering, if there's sampling conducted. How are sort of brine chemistry, lithium concentration, stack up to your expectations? And should we expect commercial production quality at the expected start date?
We will see commercial production coming through the ramp-up. Brine -- according to what we expected, the cooking up of the brine and the concentration is being achieved. Liming of the brine, with the completion of lime plant #4, will enable us to have brine ready to process through the plant. And we are comfortable that as we start to ramp up the plant, we will see commercial production coming out of it.
With regards to production from Stage 2, it's mostly technical grade, so we don't foresee a significant quality challenge at this stage. But again, as I said before, ramp-ups are always difficult in the industry, and I want to be pretty conservative with regards to expectations in that regard.
Understood. And then final question, just on the study work on the separate purification facility, I think the announcement mentioned a Class 3 study. Any ballpark figures on CapEx you can share?
I will let James answer that, but I think until we get more studies completed, it's difficult to share figures. But James, can give you some more color?
Yes. So we look forward to giving you those figures pretty soon, the Class 3 estimate. It's pretty much in keeping with benchmarks out there, no surprises in that regard. But we should be releasing to that pretty shortly.
And maybe the timing around that, please?
We said towards -- I think our previous guidance still holds. And if I'm not mistaken, that would be Q1, Q2 next 2023.
Kaan, we said about a year when we made the strategic presentation back in April. That's what we said. That's what will remain.
Your next question comes from the line of Matthew Frydman from MST Financial.
Sure. First, I just wanted to follow up on Reg's question. Christian mentioned that 2/3 of the technical-grade products that you sold during the quarter went to Naraha or that would be around 40% of your total sales. So just trying to understand how -- or if that impacts your contracted volumes that go into your third-party contracts. As Reg suggested, you pushed back Stage 2 by about 6 months. So does that affect your ability to both adequately feed Naraha and also deliver to your existing customers and contracts? Or do you need to make some kind of trade-off there into where those volumes go?
A couple of things on that. I think Christian said 1/3 of the technical-grade production, not 2/3. It's just 1/3 technical-grade production, not 2/3, in the quarter.
And the second point is, as I said before, as we start to ramp up Stage 2, we will get products with reasonable quality to be fed into the Naraha process, so we do not expect to have any problem with our long-term contracts from Olaroz. And we have been very conservative in forecasting contracts, taking into consideration the volatility that you have for the ramp-up period. So I do not expect impacts in that regard.
Okay. Thanks for the clarity around the 1/3 there, I must have misheard. Secondly, you've called out that it's the piping and electrical equipment that had delivered -- sorry, that had driven the delays in terms of your critical path on Stage 2. Can you comment on where you're sourcing those components in terms of geographies and suppliers? And what gives you confidence now that the delivery schedules for those pieces of equipment are now on track?
Well, basically, with regards to piping equipment, it is starting to be processed and spooled, so we have certainty on the equipment arriving at site at the required dates now. It had suffered some transportation delays in the process.
With regards to electrical equipment, it's mostly affected by the supply chain issues that have popped up in Eastern Europe as a consequence of the war and else, and that is creating the impact in the delay. Those equipment will arrive committed by suppliers during the first quarter of next year. That will enable us to complete the commissioning.
James, if you could please add some more color. You got the shells in more detail in your head than I.
Yes. And to maybe just give a little bit more context around that. So if we took that -- an MCC package per se, we'd have all the deliveries by the end of the year. But there might be certain components that are missing out of that, and those could be [ mid-tension sales ] with high altitude rating. So it's all pieces of equipment like that, that really are being a pain and that we're having to work with our suppliers to really get on site within that January, February time frame so we can get the plant in operation and put things under load.
On piping, other examples would be the availability of resin during the supply chain crisis. And given the fact that we've got a lot of [ FRP ], these are key issues to us. So continually working with the suppliers to try and find ways and means to accelerate these. The [ FRP ] in that instance was Chile. We have found other regional suppliers so that we can expedite these, but it has been an interesting time in the market trying to manage these critical parts.
I understand. That's quite helpful. I might just finish with a hopefully quite simple one, the revised CapEx number, USD 425 million. Can you tell us how much of that spend is remaining before first production in the middle of next year and also maybe how much you spent in the September quarter?
So Christian Cortes or James, would you have the exact numbers on expenditures to date and yet to be expended on the Stage 2 CapEx?
Martin, I can talk to that, if you wish.
Yes.
Yes. So to date, in the first quarter, the CapEx for Stage 2 was in the circa of $41 million. And factoring in the incremental costs that were flagged in today's quarterly, the estimated spend for the remaining of the year is approximately $80 million.
Got it. The remaining spend for the rest of the financial year is $80 million.
Yes, that's right. Thank you.
Your next question comes from the line of Glyn Lawcock from Barrenjoey.
Just firstly on Mt Cattlin, just could you confirm that you've got mining capacity now for 1 million bcm at the end of August? Is that sufficient based on what you're seeing now to achieve the pre-strip you need, so we'd get the outcome we're looking for in fiscal '23?
And then on the costs in the quarter, I mean production was down almost 30% sequentially, yet your unit costs were flat and you're guiding to USD 900. Just curious, is that because you capitalized a lot of the strip in the quarter? Or is there currency benefits? Just trying to understand how the costs fell out when volume was down 30%.
Yes. Keith, can you please answer the mining question? And Christian, you can answer the cost one afterwards.
Certainly. So yes, in terms of mining capacity and whether that is sufficient to mine the volumes required, for us to have continuous ore supply in the foreseeable future, the requirement is 900,000 bcm. However, we have rightsized the fleet enable us to do about 1 million bcm just to have a bit of buffer to ensure that we can deliver on that target.
The fleet we have on site at the moment, as we reported last quarter, we've mobilized a 350-tonne fleet as well as an additional mining contractor. In addition to that, this month, we've also mobilized an extra back-up machine, a 200-tonne excavator, from one of our contracting partners, again, just to allow us to have that contingency in place. So the mining fleet on site and operational is definitely sufficient to sustain the pre-strip volumes required.
Christian, if you want to take the question on the cost?
Yes. Thank you, Keith. Look, the first half of this financial year, we expect to have a higher cost base. Particularly in this quarter, we had a high capitalization of pre-stripping. In addition to that, some of the costs associated with production or the production activity were partially allocated to some of the low-grade product that we saw during the quarter.
The devaluation of the Australian dollar or the appreciation of the U.S. dollar against the Aussie dollar, we have felt on the cost side in Cattlin.
Okay. So the USD 900 guidance you think may prove to be a bit elevated given if currency stays where we are now.
Yes. Look, we think we're going to comp on that guidance. At this stage, the estimate is not significant. So we left guidance unchanged for the time being.
Okay. Could you tell me what currency you assumed when you assumed that guidance?
Well, when we were using budget for the period, we were using around 75 rate. And as you would have seen this quarter, we had -- we ended at around 63 by the end of the quarter.
I mean, obviously, if you've used 75, and it's now 63, that's a massive, almost, what, 15% reduction. But I assume there's some inflation offset compared to what you thought as well.
Yes, that's right, Glyn.
Okay. And just a third question, just extending the Olaroz 2 discussion, I mean I understand you talked through a little bit more detail on the delays, et cetera, but how confident are you really? I mean you've had suppliers slip and slip again. I mean have you built quite a bit of fat now into the schedule with your second quarter calendar '23 first production? Or if we get -- we don't get delivery in January, February with some of those minor components you talked about, you'd just think good delay again, I guess.
I will ask James to give you more color on that, but we feel pretty comfortable with the schedule that we put together. The team has developed certain alternatives for those minor components. James can explain those in more detail now.
Yes, we've taken to an approach of working off a P90. So we're being conservative because we want to -- we do not want to disappoint in the future. So there are opportunities for us to improve, but at the moment, we'll go for that Q2. That makes sense for us. So we're right on the board, and we know we can hit the schedule.
We now have Lachlan Shaw from UBS.
Apologies for the technical issue before. Just to extend Glyn's question on timing around Olaroz Stage 2, so just in terms of your other projects, Sal de Vida, James Bay, can you just talk to the learnings that you're taking from this further delay? Do you see that you might want to take a more conservative approach at those projects as well?
Well, we will -- as we said in the release, we're in the process of constantly reviewing the forecast on our projects. We have been working with James and the team in delivering -- in working and preparing P50, P75 and P90 scenarios for all our projects. And we are constantly reviewing how are we performing against those scenarios. And the objective is to keep the market updated. And the factoring into the learnings is to assume that within those differences between a P50 and P90, that sometimes the components in this case, so deliveries from the equipment, may be delayed even if the contractors commit to a certain date.
James, can you add some more color on that?
I think one of the other lessons that we've learned is definitely we'll benefit from a little bit more engineering detail than the industry is used to. We have really good value projects, and we can take a little bit more risk in terms of pre-FID funding to get the engineering so that we can de-bottleneck procurement challenges in the market. So we're learning those lessons to try and keep our schedules intact. But as Martin says, with each study, we'll be very disciplined in terms of what is our P50, what is our P75 and P90 and guide the market accordingly.
Okay. Next one, just a quick reminder, hopefully, just remind us on the marketing strategy for Naraha hydroxide sales, please?
Yes, I will ask Christian Barbier to answer that one, please.
Yes. Lachlan, thank you very much for your question. Look, we are, this quarter, going to start the production of the first tonnes of Naraha to complete the commissioning. And we've been in conversations with a number of customers. As GPC is our partner in this project, there will be Japanese buyers in the customer portfolio, but we're also talking to a number of other customers to market this product. It will be, as is custom in this industry, mostly contracted. But be mindful that we're talking about 10,000 tonnes of lithium hydroxide per annum. It's not a huge quantity, so we're also not looking at having an extremely large number of customers. I'd say probably between 3 and 5 main customers.
Okay. And then in terms of contracted tonnes, terms and conditions for realization, so how should we think about that? What's the strategy on realization? Are you looking for spot or floor ceilings? How should we think about that?
Yes. Look, we're not into locking in floors and ceilings at this stage. The current level of pricing is very attractive, and we intend to have our sales price reflecting the upside of the current market price.
Okay. Great. And last question, again, hopefully a quick one, recoveries at Mt Cattlin in the quarter low because of fines. Is that the expectation for December quarter 2, quite a low recovery, because there's still fines coming through the plant?
Lachlan, it is more associated with the quality of feedstock in terms of contamination with basalt. The fine-grained spodumene we processed in July is now depleted. There's none left. So we envisage that for the second quarter, we'll see similar, slightly better, recoveries. And that is associated with the contamination, not with the fine-grained ore.
There are no further questions at this time. I would like to turn the call back over to Martin for closing remarks.
Thank you very much, Paulie, and thank you all for your questions and comments. As said, we are committed to delivering scale and production stability required by our customers as the world transitions to a net zero economy. In achieving this, we must remain focused on strong operational performance, project execution and managing costs in this environment.
Thank you for joining our quarterly results briefing today. If you have any further queries, please do not hesitate to contact our Investor Relations team.
This concludes today's conference call. You may now disconnect.