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Earnings Call Analysis
Q1-2024 Analysis
Allkem Ltd
Allkem had a remarkably strong operating quarter with record-breaking production figures at Mt Cattlin and robust lithium carbonate production above budget at Olaroz. Group revenue hit an impressive $327 million, showcasing a healthy cash operating margin of 72%. The company's financial strength is evident from its substantial net cash position of $671 million at quarter's end.
The company is actively advancing major projects, in line with its growth strategy. With a milestone at Olaroz Stage 2 witnessing the first wet production and upcoming activities planned for the next 15 months, Allkem is on a solid path to escalate operations. Concurrently, they are constructing Sal de Vida Stage 1 and accelerating engineering and procurement at James Bay. Naraha's plant in Japan is now capable of running at full capacity. In parallel, there is a proposed merger with Livent which is anticipated to conclude by the end of 2023, aiming to form Arcadium Lithium plc, to propel and secure Allkem's expansion and strengthen its integration into the electric vehicle (EV) value chain.
Olaroz has excelled in producing higher-grade battery lithium carbonate, achieving record sales volume and generating $123 million in revenue for the quarter. Mt. Cattlin's spodumene production surged by 25% from the prior quarter, amounting to over 72,500 tonnes and boasting record quarterly revenue of $201 million. Both sites reported robust cash margins of 77% and 69%, respectively.
Substantial progress has been made at Sal de Vida with the construction of the first two strings of ponds and commencement of work on the carbonation plant. Deliverables are on track with mechanical completion, pre-commissioning, and commissioning activities expected by the first half of 2025. At James Bay, a significant increase in the total mineral resource has been reported, and project economics remain attractive despite increased costs due to inflation with the project's engineering and procurement 84% complete.
Allkem has reaffirmed its commitment to long-term growth by updating projections for LCE production capacity, aiming for significant figures by financial year '28. Also, the Cauchari update points to a new production capacity coming online in the second half of calendar year '27, highlighting the company's strategic planning for future expansion.
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Good day, and welcome to the Allkem Limited September Quarterly Results Briefing. [Operator Instructions] After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to ask all participants that this call is being recorded. Thank you.I'd now like to welcome Martin Perez de Solay to begin the conference. Martin, over to you.
Thank you, Gavin. Welcome, everybody, and thank you for joining us for Allkem September quarterly results briefing. As usual, I will be providing an update on our business; and Christian Barbier, Chief Sales and Marketing Officer, will be providing us with a market update. Also joining us for the Q&A are James Connolly, our Chief Technical Officer; and Liam Franklyn, Head of Mt Cattlin Operations; and Christian Cortes, our CFO.We have delivered yet another very strong quarter, particularly from an operational perspective. Mt Cattlin achieved quarterly record production and record revenue. Olaroz achieved above budget lithium carbonate production, record sales volume. We have also made solid advancements in project execution across the portfolio in line with our growth strategy. In Argentina, we are proud to have successfully achieved a milestone of first wet production at Olaroz Stage 2 with commissioning activities currently underway. Ramp-up remains on track to be completed in the next 15 months.We also continued to advance the construction of Sal de Vida Stage 1 with the first 2 strings of ponds complete and work now underway on the carbonation plant. In Canada, we have advanced engineering and procurement at James Bay and commenced a drilling campaign to further delineate mineralization. In Japan, Naraha has demonstrated its capability to run at 100% capacity and battery-grade qualification with customers has commenced.Looking at the portfolio, we recently updated our projects in line with current conditions and confirm material growth underpinned by our group results of 40 million tonnes of LCE. We plan to also deliver 170,000 and 79,000 tonnes of LCE production capacity by financial year '28 across the assets. Our capital development costs, operating costs and project schedules have been updated to reflect industry-wide inflationary conditions and in country-specific conditions. Results confirm robust economics and the Tier 1 nature of our assets and growth portfolio.We continue to be in a very strong financial position. This quarter, we generated group revenue of approximately $327 million. Group cash operating margins remained robust at 72%. Group net cash at the end of the quarter was approximately $671 million. We continue to focus on our long-term strategy to deliver scale and product flexibility to customers and remain fully committed to the delivery and execution of our growth pipeline. The proposed merger with Livent helps us accelerate and derisk our growth profile while driving higher vertical integration into the EV value chain. We have advanced the transaction and we are still currently targeting completion around the end of calendar year 2023.Allkem and Livent have agreed that the name of the combined company will be Arcadium Lithium plc upon a successful merger of equals.From a sustainability perspective and starting with safety, we recorded a 12-month moving average total recordable injury frequency rate of 2.03, slightly higher than the financial year '23 result. Three recordable injuries occurred during the quarter with one resulting in a lost time injury. Investigations have subsequently been carried out with corrective options implemented. Community engagement and share value projects continue across all our operations and regions in which we operate. Some highlights include a new physiotherapy room at Susques Hospital near Olaroz following a collaborative effort with the community and the Ministry of Health. We also continued to deliver health and well-being programs through the local communities at Sal de Vida.Moving to our operations. At Olaroz, we achieved above budget quarterly production of 4,453 tonnes of lithium carbonate. 42% of this was battery grade, which was higher than the previous quarter, in line with customer requirements. Strong operational performance continued with excellent plant reliability, low downtime and high brine feedstock concentration. As previously stated, September quarter sales were expected to be higher and we achieved record quarterly sales volume of over 4,500 tonnes, up 33% from the prior quarter. Sales generated a total revenue of $123 million in the quarter. Sales were completed and $25,981 per ton on an FOB basis and cash cost of goods sold was $6,088 per tonne, up 4% quarter-on-quarter.Gross cash margins remained robust at 77%. Cost of sales over the last year have increased due to the elimination of export incentives, the rise of material costs, including soda ash, lime, labor and energy, which have been impacted by inflation. However, these impacts have been in large part, mitigated by improved operational performance, high brine concentration and higher recoveries.Over time, unit costs will be offset as we progressively increase production volumes from Olaroz Stage 2, where we will focus on achieving product volumes and quality specifications over the next 15 months of the ramp-up period. At Mt. Cattlin, production achieved a quarterly record with over 72,500 tonnes of spodumene concentrate produced at 5.3% lithium oxide grade. This was a 25% increase from prior quarter and in line with the financial year '24 production forecast of 210,000 to 230,000 tonnes. We shipped over 76,600 tonnes of spodumene concentrate and generated record quarterly revenue of $201 million at an average price of $2,625 per dry metric tonne on a CIF basis.The gross cash margin remained robust at 69% and was based on low cost of production of $636 per tonne for the quarter. Costs were lower due to higher production volumes and recoveries compared to the previous quarters. Positively, we have also received regulatory approval for Stage 4 cutback and mining commenced in early October. At Naraha, the scheduled maintenance shutdown was completed during the quarter and plant performance demonstrated capability to run at 100% capacity. 526 tonnes of lithium hydroxide were sold and we also commenced the battery-grade hydroxide qualification process with customers.At Sal de Vida, we have completed construction of the first 2 strings of ponds. The brand distribution system is complete and the booster stations has also been commissioned. The third string of ponds is well advanced and over 63% complete. Engineering of the process plant, it's at 66% completion, procurement, it's at 70% and construction, it's approximately at 13%. After a rigorous review of our cost and schedule, we gained a better understanding of our execution plant, factoring in the ongoing import challenges and delays experienced in country and regional productivity factors.We realized our first -- we released our first project update since early 2022 with revised OpEx for Stage 1 and the combined Stage 1 and 2, which both remain highly competitive. CapEx for Stage 1 and Stage 2 also increased in line with inflationary conditions with Stage 2 benefiting from Stage 1. Substantial mechanical completion, pre-commissioning and commissioning activities are expected by the first half of calendar 2025 with first production expected in the second half of '25 and ramp-up expected to take 1 year. Stage 2 construction is anticipated to commence upon receipt of applicable permit and substantial mechanical completion of Stage 1 with Stage 2 first production approximately 2.5 to 3 years thereafter.Similarly, we updated James Bay Mineral Resources and all reserves, project cost and project economics. This is the first update since late 2021. The Total Mineral Resource increased by 173% from the previous estimate to 110.2 million tonnes at 1.3% lithium oxide grade. CapEx and OpEx have increased in line with inflationary conditions, but overall, remain very competitive, supporting a very attractive economic results. Engineering and procurement advanced to 84% completion by the end of the quarter with the process plant package at 87% completion.Stakeholder and community engagement remains very positive. The IBA with Cree First Nations remains in progress and has resumed after the recent state of emergency arising from the forest fires. The environmental and social impact approval draft report was completed in September by the Quebec government personnel and submitted to COMEX for review and final evaluation. A 40,000-meter drilling campaign commenced in last -- in late September, 30,000 of which will target further definition of the ore body. The remainder of the program will target possible extensions to the mineralization and newly identified targets.We also released our first project update to Cauchari since 2019, supporting a base case of 25,000 tonnes per annum production capacity coming online in the second half of calendar year '27. The study demonstrates the value of the project on a stand-alone basis. We do see substantial opportunities to integrate this asset into Olaroz complex and these opportunities would likely to reduce capital and operating costs. We are investigating this as part of our Olaroz Stage 3 expansion studies.I will now hand over to Christian Barbier, who will provide us with a market update.
Thank you, Martin. Good morning, everyone. It has been an interesting past few months. The price volatility we've observed is a function of the relative immaturity of the industry and the high degree of sentiment that influences pricing outcomes that come with this immaturity despite strong fundamentals and the mismatches along the uniquely long battery supply chain as capacity grows. The lithium market balance remains fragile. Demand is growing at a pace at almost any other industry than the [ year fraction of ]. Even if the increase this year has been somewhat slower than expected last year, resulting in a catch-up of supply.At the same time, delays may easily move the market back into deficit. Despite expectations of a wave of lithium supply this calendar year, it has not materialized as projects have taken longer to commission or ramp-up to nameplate and longer to reach production specifications. This fact is often overlooked. The initial supply seldom meet battery-grade specs and require further processing and thus, again, undershooting supply expectations. We believe the electrification trend remains on track. EV sales remain on course to increase 35% year-on-year to 14 million unit sales in calendar year 2023, in defiance of global macroeconomic headwinds. China and the U.S. are reaching milestones in terms of EV sales and penetration rates. And ESS performance continues to grow strongly across the globe as energy storage targets are announced or expanded.During the quarter, Allkem delivered strong sales performance, reaching record sales volume across carbonates and spodumene concentrate products, demonstrating the strength and the resilience of our customer portfolio. Production performance at Olaroz and Mt Cattlin remained very strong over the quarter, which meant that our carbonate inventory didn't drop as much as targeted. However, our order book for the December quarter is quite full already, and we expect another very strong sales [ grade ].Again, during the past quarter, we've been able to achieve pricing above industry average, thus maximizing value for our shareholders. It's also worth mentioning that a significant part of sales contracts is now priced subsequent to shipping dates, when 6 or 12 months ago the ore was priced before shipments. This industry trend is quite widespread in China and significantly reduces the time lag of our average pricing compared with the main indices. And it will also provide more reactivity in our lead prices have likely bottomed out.Thank you. I will now hand back to Martin.
Thank you, Christian, and I will now hand back to Gavin for the -- to commence the Q&A session.
[Operator Instructions] Your first question comes from the line of Rahul Anand from Morgan Stanley Australia.
Look [Technical Difficulty] perhaps one for Christian. Christian, you talked about how the industry is moving towards more China-based pricing and product being priced post sale instead of presale, which was a trend 6 to 12 months ago. Can you provide a bit more color on that? I mean, does that mean that you're now having to change the pricing mechanisms on your contracted tonnes, whereby you're now pricing them on a provisional basis like we see in the iron ore industry, i.e., with a 1- to 2-month lag post revenue recognition? Is that the right way to think about it?
Look, you're not wrong in the sense that, yes, the industry practice has shifted during the course of the last few months. And it is a measure of how, in particular, cathode producers have been trying to protect to hedge the margins basically underlying the buying price to their selling price. This has happened in China mostly or really probably we've only observed that in China. And as far as our contracts, we continue to implement our shipments as per our contract conditions.But you probably would have seen over the last couple of quarters with the increase of volume -- spodumene volume that we've produced and shipped, we've diversified our customer portfolio, which actually puts us in a good position to manage our contract book as these contracts will mature. And most of these new contracts, whether they are short or longer-term, use different pricing formulas, but basically, they use a pricing liquidation period based on shipping or arrival and not prior to shipments and sometimes quarter prior to the shipment quarter. So yes, it is an industry trend and we've observed that also on the chemical side, especially for carbonate.
Perhaps one for Martin. Martin, Stage 1, obviously going really strong, being helped by the Stage 2 tonnes coming in. I just wanted to understand perhaps the battery grade limits that currently exist in the plant. Is there any view there to potentially increase that number or proportion at site? Or is it still being considered that the offsite purification plant is the way to go? And what's the progress on that as well in terms of that study?
Quite a few questions. With regards to the percentage of battery grade, we have been operating at higher percentages. And the way we define that is based on our customer requirements. So, the amount of battery grade we produce at Olaroz, it's based on what our customers require. With regards to operating capacity and increase in battery grade, shall be a significant increase in budget grade requirement from our customers, as you said, off-site purification is a way to go, particularly because Stage 2 has been designed to produce 100% technical grade product to be used as a feedstock for Naraha. And the customers demand in technical great products and shifting Stage 1 more towards budget grade if that is required.
And then in terms of the Stage 2, sorry, go ahead.
I was telling you and studies on purification plant continue to progress on off-site purification if that is required, we would be ready to do that.
And then just my final one is on Stage 2. Wet production in mid-July and commissioning continuing. Is it too early for us to know whether the plant would be able to produce very close to battery grade like we saw at the mine site visit last year? Or do we need to wait for that information once the plant is fully ramped up?
Yes, it is early to conclude that Rahul. We want to have the plant fully ramped up the operation for some time to test the ability to produce higher quality than technical grade. I do trust the technical improvements in the plant are very good, but we have to run it and it's closed at this point in time.
[Operator Instructions] And your next question comes from the line of Austin Yun from Macquarie.
Two questions from me, please. The first one is on Olaroz. Just wondering how much of the high-grade brine stock you have at the Olaroz. I recall that you have quite a bit during the site of visit. And do you plan to use that to support Stage 1 structure or [Technical Difficulty] for the Stage 2 ramp up? I will come back with a second.
Listen, it's the brine that we have Olaroz support is both Stage 1 and Stage 2. The availability of our larger evaporation area in advance of bringing Stage 2 into production has increased and enabled us to keep that higher brine concentration throughout the year and we shall see that continuing to happen.
And the second one is on Mt Cattlin. Just wondering if you can provide some color. I mean, really strong recovery performance. Congratulations. Should we kind of think the recovery to stay at this 67%, 68% over the next couple of years? Is that in line with your [indiscernible]?
I'll ask Liam to answer that question in more detail. Liam, please.
Yes, no problem, Martin. So, recovery has been strong this quarter. A lot of that is influenced by the quality of ore that we're currently in at the moment in the stage of mining. The good news is that, that should continue throughout the remainder of the financial year. After longer periods than that we still got to process some of the information from our grade control drilling to really get a good sense of that for future years.
Your next question comes from the line of Kaan Peker from RBC.
Two questions from me. The first one on Mt Cattlin, probably following on with the previous question. But on that, can you just talk through what grades that you're processing? Is it above reserve? And how much CapEx was spent on the asset this quarter? And I'll follow up with the second.
Liam, can you expand on the grade question?
The head grade at this point in time is slightly ahead of reserve, but across the course of the project, it's in line with expectations. So, we're in a good period at the moment, and we'll do for the next 6 months, tapering off towards the end of the financial year and into the next year. And sorry, I didn't quite catch the next question was around the capital investment. Was that right?
Yes, the amount of CapEx spend in the quarter.
The CapEx spend in the quarter is going to be reasonably minimal. It's going to increase in the next half more as we invest in infrastructure.
Martin, it's Christian here. I can provide a bit more just with color on the CapEx. The CapEx incurred in the quarter for Mt Cattlin, as Liam already said, is quite minimal. We spent less than $10 million during the quarter, although as we make progress in the next 3 quarters, that amount will increase in line with what Liam was just highlighting.
And the second question is around the cost at James Bay. It looks like there's a step-up in the long run costs and appears to be driven by mining dilution. Could you maybe expand or clarify that?
I'll ask James Connolly, who put together the study to answer that one.
Yes, I think in the next cut of our mine design, we look forward to reducing some of that dilution that you've seen. Obviously, we were -- we had a drilling update that we'd recently done and some of the opportunities with some of the smaller lenses coming through smaller pegmatites added to the dilution. So, we'd be mindful that we'd be looking to maintain grades as we did historically over the initial years of life. And if you see us manage that stockpile of that low grade material through surface stockpiles, that would be the way to go. But we haven't done the work yet, but we do look to get it back in line where it was in the previous study.
Your next question comes from the line of Alex Papaioanou from Citi.
Just following up on comments around the inventory and strong order book in December quarter. Are you looking to sell majority of your built inventory in December quarter? Or should we expect additional sales into the March quarter?
We're continuing to progress with the sell-down of our inventory during the December quarter and may take part of the March quarter where you're seeing a strong performance of the Olaroz production as we start to see production coming through from Olaroz Stage 2 that will start to see higher inventory levels and higher sales as well.Christian Barbier, if you want to add something on that, please?
Look, we have reduced during the September quarter, only marginally our level of carbonate inventory despite record sales because we had an extraordinary performance from Stage 1 in Olaroz again. And we also didn't ship any carbonates to our Naraha plant affiliates this quarter because they had enough inventory. So for the December quarter, to answer your question, we've already recorded a very high level of sales. So, volume is expected to be significantly above the September quarter. And you can expect, and this is what we indicated last quarter to have a progressive adjusting of our inventory levels over a few quarters. So, this remains on course.
My second question. So, with the Argentinian Primary Elections done and the final upcoming, what would the renewal of the existing party mean for you and how you operate in terms of any fiscal changes, if there's anything to note there?
It is a good question. We had Primary Elections last weekend. There wasn't a winner. So, we have to go through a ballotage in Argentina again on November 19. The 2 running candidates in the ballotage have manifested the support for the lithium industry. The current Minister of Finance was one of the candidates and got [ 37% ] of the votes from the official party and the challenging who is coming from an Libertarian abstract and Libertarian as in the U.S. type towards the right, not the European style. Both of them very supportive of the lithium industry, both of them were supportive of Argentina reaching fiscal balance and both of them have manifested the intention to continue growing in an industry that help the country.Nothing that has changed in terms of new fiscal terms and particularly important to mention that the provinces in which we operate, the current governors have renewed their mandate. So, we don't foresee any change in the provinces who are the ones controlling particularly royalties and the main terms of the concessions. So, no significant changes on the political front, I would tell you, relatively positive despite a still difficult environment in Argentina and we continue to see foreign exchange restriction supply for some time until fiscal balance is reached and the situation starts to ease out.
Your next question comes from the line of Mitch Ryan of Jefferies.
I know that you've updated the pre-tax NPVs for several of your projects. And if I go through them, [ Cauchari $2.5 billion, Sal de Vida, $5.5 billion, Olaroz $7.1 billion and James Bay, $2.9 billion ]. I get a pre-tax NPV of USD 18 billion, and obviously, that excludes Mt. Cattlin and Naraha. In light of that, are management comfortable as the transaction metrics remain fair and reasonable to shareholders?
Thank you for your question, and I think it's a good one. Yes, we remain comfortable on the transaction have been fair and reasonable for our shareholders. The transaction is a script merger of equals. And we think that both parties are adding value to the merged company. As we described before, the transaction relies on 3 main strategic pillars. One is becoming an important supplier for our customers. This is a customer -- this is a market in which demand would concentrate around turn of sold buyers. So, you need to be a larger supplier to the industry in order to be relevant for them.Number two, it's vertical integration is key and essential. As we discussed in previous questions, the amount of battery grade product being required, the requirement of customers in terms of quality, which we are seeing in the complex product qualification processes and the fact that the industry will continue to evolve and require particularly detail and quality lithium molecules being vertically integrated is important. Both parts add a lot of value into the vertical integration. Livent would put us ahead of where we are in terms of vertical integration and delivering these specialty lithium chemicals to the market and also the growth opportunity. Both companies bring a unique growth portfolio into the merged entity that will enable us to continue to grow and accelerate our ability to deliver this quality product to -- and a larger product portfolio to our customers.
Your next question comes from the line of Reg Spencer of Canaccord.
How should we think about the inflationary impacts on consumables that you outlined today? And how do those current rates or those current costs compared to the cost input estimates that you use with your recent project economic updates. Are they consistent? Are they based on any reduction in current rates for consumables? Just trying to get a feel for costs that you reported today relative to those that you put out in your updated project studies.
A few have seen through those updated studies, costs have been increased and that was also part of previous questions. That is a recognition of the current increase in the cost of consumables that we are seeing from the inflationary environment. And the studies not only incorporate those increases in costs but also in corporate increases in production capacity and improvements in efficiency and recovery rates as we see through the assets and as we continue to expand and bring them in.There's also temporary movement on the cost on the Olaroz basis because it's impacted by the lag between inflation and devaluation in Argentina, which creates quarterly movements. And when you look at it compared to previous quarters, particularly about a year ago, there's a significant impact from the elimination of some export incentives that were applicable to production in the Puna. So, all of that has been factored into the studies and the studies recognize the mix of all those impacts.
I must have missed that earlier question. Next one, you mentioned Cauchari that has always been in the portfolio, but I suppose you've had so many other things going on that there hasn't been a lot spoken about it. You outlined a potential development scenario for the project with all those recently released studies. You mentioned that it might fit into Olaroz 3 expansion. But I'm just curious as to how we should think about the current Allkem growth strategy relative to what that might look like assuming the merger proceeds, there will be by the looks of things competition for capital amongst various growth opportunities. Is this something that we should figure out now or perhaps is a question for Paul Graves, assuming the merger completes?
Well, listen, I'm having the discussions with Paul over time with regards to the strategy on how the assets shall be developed. I think when you look at Cauchari, what we have done is updated the stand-alone basis study that was put together by Advantage Lithium, and updating that study shows very strong and profitable economics. If we were to consider the project stand-alone, the way you should look at Cauchari is bringing Cauchari as part of Olaroz expansion. You will see CapEx reduction as we take advantage of existing infrastructure. And you will also see lower production cost, improving the results from Cauchari.Also, when you look at it in terms of the size that you can reach from Olaroz Stage 3 expansion, bringing the brine from the Cauchari assets enables to have a larger Stage 3 expansion improving the overall economics of that project, so -- and that will apply regardless of the merger with Livent. So, it's -- that would improve in terms of, as you mentioned, in terms of capital availability or how do you compete for capital between the different projects of the new merged entity. This is a project that will ramp up as a consequence of the improved economics from bringing it into a larger and more strong Olaroz Stage 3 expansion.
Your next question comes from the line of Robert Stein of CLSA.
Just a clarification question for something that was addressed earlier on the merger ratio. How sensitive is that merger ratio to converter margins given that converter margins at the moment are pretty anemic. I was just wondering, given that, that was part of the transaction benefit that Livent brought to the mix, how sensitive was that ratio to that?
The way the merger ratio was put together was considering the fundamental value that both companies are bringing into the table and looking into the long-term projections of values. As you can see in market volatility, we have been -- the value shifting from the upstream to the downstream quite a few times and there's a lot of volatility around it. When you look at it in long term and you calculate the fundamental value that both shareholders are bringing to the merged entity, that's the way in which the ratio was calculated.
So, if there was a substantial shift in the market or your understanding of the market on a long-term basis and that would provide grounds then to reassess the ratio, i.e., if there was an oversupply of converting capacity or there were changes in demand for raw material -- upstream raw material?
But as I said before, the ratio was defined on the long-term fundamental value of both companies, so what both companies are bringing to the table. And should that change dramatically, we'll have to see. But for the time being, we're not foreseeing any change in merger ratio whatsoever, based on what we're seeing in the market today. It's both valuations of the companies have been equally impacted by market volatility.
And sorry, just a quick one on James Bay, any update timing there?
Hello?
Just James Bay. Can you provide an update? That may have been earlier on the call, but -- and apologies if it's a repeat of the question. But just on James Bay, whether there was an update to permit timing, whether that is starting to creep into first or delivery?
Well, listen, we continue to progress on the negotiations. IBA negotiations are in the final stage. And we're going through the final stages of approval of IBA. If you remember, we've said in previous calls that the forest fire start stroke in Canada in the Eastmain region have impacted and had delayed some of the meetings at the Cree community of Eastmain. Forest fires are over now and we have regained momentum on those discussions. So, we're progressing significantly. The Government of Quebec submitted to COMEX, the draft for final review of the ESIA back in September and it's being considered by COMEX and we expect to have resolution from both things in a relatively short period of time, taken into consideration that the Quebec Province has been challenging in terms of timing since there are no time limitations for the government to issue the approval.
Your next question comes from the line of Lachlan Shaw of UBS.
Two questions from me. So firstly, just a quick one. So, costs at Olaroz, a bit over $6,000 a tonne, but the revised study is putting that at about just a touch over $4,000. Can you just help me understand the bridge to get to that lower cost? Is that solely volume? Or is there also assumptions there on sort of level cost out? I'll come back with a second one shortly.
It is volume increase and it's also the impact of inflation and devaluation in Argentina starting to match over time. As I said before, the costs in this period are impacted by a larger gap in there.And James, you wanted to add something to that answer, please?
Yes. If we break it down, so Martin is right, the inflationary pressures, especially hit salaries and that's a temporary measure as we know, as Argentina goes through these macroeconomic phases. But we see a reversion of that to a more normal situation over the next 2 years. Similarly, on market analysis around soda ash and fuel, especially natural gas, it shows a reversion coming back to more normal rates. So, to answer Reg's questions, yes, we honor exactly what we have in our budget and our guidance and our actuals. That's reflected in the technical reports. But yes, there is a transition over time back to normal, normal pricing, whether it's a supply side from our reagent supplies, which we've seen a lot of movement on and the market analysis says that. But we're coming back to a more normal space sort of for the models themselves, we think that's more realistic.
And the increase in volume is quite significant as well.
Second question is, I guess, on the market. Christian's comments about customer demand remaining strong and growth remaining strong, notwithstanding prices have come off 60%, 70%. Two elements here. Firstly, are you seeing reports of supply exiting the market? And secondly, in terms of your inventory, is that now stable in terms of what you're carrying now in front of the sales book? Or would you like to actually be carrying less inventory going forward?
There's a lot of questions in there, actually. So, in terms of market growth, as we mentioned earlier, we're heading for 30% to 35% year-on-year growth in EV sales. So, there is no question about the strength of the underlying demand. And despite some softness in some comments and despite some realization a little bit below expectations from last year, you still have in China, a market share of 30% to 36% in August. In the U.S., the market share was -- has reached 10% now and conceived really last year. And in Europe, despite a difficult situation, the market share is around 22% or 23%. So, still a lot of growth everywhere in every jurisdiction.Now what we have is a very complex supply chain. And the supply and the loan balance applies at every step of the supply chain from the producer to the converter to the cathode maker to the battery maker and then to the OEM. And all the capacity that needs to grow across the supply chain, while doesn't grow at the same speed at every step of that supply chain. And this is why it creates some friction in some places. So we did expect and I think most of the industry expected a rebound in prices at the end -- towards the end of August. I expect that market would pick up again because people normally build up inventories towards the end of the year, which is a strong period. And this did not happen. It did not happen also because people are concerned, sentiment is down and everyone in the supply chain has been maintaining very, very big inventories.So, to your question about some production exiting upstream, yes, with the current level of prices, you probably have heard that independent producers of lepidolite in China have idled their operations. They're just playing their part as swing producers, which is a normal thing to do. Does that answer your question?
Yes. And then just the second part of that was on your inventory. So, are your inventory levels normal in terms of what you'd like to hold going forward? Or would you look to be -- again, you talked to a very strong sales book December quarter already. Would you be looking to sort of draw that down a little bit into that strong sales book?
Yes. So look, you can expect to see inventories drop during the December quarter. As I mentioned, we are slowing down our inventories progressively and increasing our sales progressively. So, you will certainly see a reduction of inventory during this current quarter. And as we continue beyond, they will -- the inventory will be a measure of the overall production. So, with the development of Stage 2, we will recalibrate our target inventory considering the overall production.
Your next question comes from the line of Hugo Nicolaci of Goldman Sachs.
Good to see the improvements at Mt Cattlin. I had more a couple of follow-ups for me, please. Maybe just starting with James Bay. I appreciate that maybe parts that are out of your control in terms of getting the permitting through and government not having a time line here. But can you maybe some more color on if there are any sticking points? I mean is it purely the administrative process? Or are there still some environmental or technical issues around maybe arsenic disposal or anything like that, that are still being worked through? And then I'll come back with my second one.
Yes. Listen, thank you very much Hugo for your question. No, there are no environmental issues that we're aware of. The Federal Government of Canada has issued approval back in January with some comments and all of them were addressed properly. So, we don't expect any environmental issues from COMEX as we didn't expect from -- as we didn't have any major one from the federal approval. So, I think at this point in time, it's more the bureaucratic process and going from back and forth between the Ministry of Environment and COMEX and the halt in the process that we have during the forest fires that created some commotion around the [ Cree-led ] meetings and did not enable us to continue to progress with the process. So, things are back on track, and we hope to get that bureaucratic process completed quickly.
And then just second one, maybe around Naraha. Can you just clarify maybe what volume you produced in the quarter there and if you're still expecting to be battery grade qualified by the end of the year?
We started the budget grade qualification process during the month of July and we are continuing with that. We initially thought that it was going to take between 9 to 12 months. We are on track of that or working with our customers that involve not only the cathode manufacturers but in some cases, the OEMs as well. So, it's a lengthy process. We are on track with our expectations with regards to the volume that we sold about 500 tonnes of production of hydroxide during the quarter. That was not qualified as battery grade because we had done and had the qualification process with the customers.And if you remember, during the month of August, we have -- we did a major shutdown of the plant and checked all of the pressure valves and all of the pressure system have to be rechecked and recalibrated according to regulations in Japan. So, that took the whole month of August, not a large production during this quarter in Naraha.
And maybe just following on Naraha, just given the Japan government kind of incentives around building downstream processing capacity and potentially getting half of the CapEx rebate, I mean, how are you thinking about future expansions there?
So, it continues to be -- Japan continues to be a very attractive place. The government continues to offer rebates and we have our ability to expand the plan between 6,000 to 10,000 additional tonnes of capacity. And the government is offering rebates in other places of Japan as well. So, Japan is a very interesting market for us. We have a good experience there and provided numbers continue to be as strong as they were for Naraha Stage 2, we'll look into that into our global portfolio of downstream capacity.
Your next question comes from the line of Matthew Frydman of MST Financial.
Martin, I'm wondering if you can talk about what's driving the timing around the scheme booklet and the independent expert report. I know that previously, you flagged the November timing for the scheme booklet, but I'm thinking that's a little later than what you had hoped for probably a few months back and it doesn't appear to leave a lot of time for shareholders to really digest everything, particularly when you're still hoping to complete the [ traction ] before the end of the year. So yes, firstly, can you talk to what's driving the timing? Could that timing slip further?And secondly, how important do you think it will be to, I guess, conduct a further education piece with shareholders, given some of the questions on this call today to get them comfortable with the structure of the merger.
Regarding timing, we are aiming to complete the transaction before year-end and giving shareholders enough time to digest the discount booklet and the S4 document in the U.S., both documents, scheme booklet and S4 are now being reviewed by the regulating authorities in Australia and in the U.S. So, at this point in time, we are doing everything and we know that we have a transaction that can close before the end of the year depends on the regulators meeting the timings, but we are working in that direction to achieve a transaction before year-end.
Yes, in terms of the education piece, do you expect that, that will be important?
I think it would be. And we're planning on the further once scheme booklet is released and the S4 is released further engagement with investors to continue to discuss transaction and address all of the questions that maybe are there.
Your next question comes from the line of Glyn Lawcock of Barrenjoey.
Martin, just a little bit further on the market. If we could just get Christian, maybe talk a little bit about the realization for your carbonate versus, say, the indices because benchmark had the FRB LatAm Index averaging 40,000 for the September quarter. So, it's quite a big miss to that. And then Christian also offered some good insight into the market, but he sort of talked about 30% to 35% growth in EVs. That's led to inventory build in the supply chain, yet we're seeing lepidolite producers idle production. Just what's driving the excess in inventory this year? And how does he see the inventory now? Is it starting to finally come down? And when does it start to get to levels that maybe we get some support back in the price? I know it's a hard question, but any color.
Thank you, Glyn. I'll pass it on to Christian to answer the details on that one.
Glyn, yes, thank you for your questions. So regarding the price, look, there's a variety of indices that are used in the industry. Benchmark is one of them. In the other than in China for domestic China, people are using some others. So, those are probably more used pricing. What is driving also our average price this quarter is, as I mentioned, the current use of [ Quorum minus 1 or N minus 1 ] has -- or even fixed price for spot sales has mostly been replaced in the Chinese market by pricing at the time of delivery.So far us, some provisional pricing that we had recorded in the June quarter have been reviewed downward after delivery in the September quarter. And likewise, when the price -- the market price dropped during the month of September, shipments that were made in August and early September and not yet arrived at destination or fully priced have been marked-to-market at the end of September. So, this is what has affected our September with an average pricing. It shows conservatism in the way we report prices. It also means that when the market goes up, our activity in prices will be higher.Now regarding inventory, actually really we don't see a lot of inventory in the supply chain and we see a pretty healthy situation. So maybe I'll give you some details because there's a lot of information that flies around and some doesn't make sense. So downstream, cathode makers, as I mentioned earlier, have been extremely disciplined over the last 6 months and they don't want to take any price risk with their stock. Our observation is that they generally have about 1 week of inventory of finished products. They may have sometimes up to 2 weeks, but certainly no more and often they just have a few days. So, cathode makers, no. Battery makers have more inventories, yes, and that's been reported.But sometimes with completely ridiculous figures. The norm for battery makers is to have between 1.5 and 2 months of finished products. We hear that some have a little bit more, but you may have seen and a little bit more because they might have built up some inventory ahead of this second half of the calendar year when the season is stronger. However, you may have heard or read that CATL indicated last week that they actually have less than 2 months. They have 55 days of inventories of finished products and they had 92 days at the same time last year. And that's the biggest battery maker in the world.So, one of the issues for battery makers and their inventory is that not all the cost decrease has reached the finished battery. And that's a frustration that OEMs have voiced. Now, upstream to miners because they don't have a concentrator, certainly have seen the DSO becoming a non-saleable product. So, they have stuck. At our current prices, there's no market for DSO. African producers don't need to make money. So, the Chinese owners transfer profits to China through Hong Kong. So, they generally export their product, their concentrate or they blend with DSO, we don't see significant stockpiles there, but they may be a little bit in China. That's for upstream.At converters, again, we mentioned the situation with cathode makers. Converters who produce the finished chemicals, they have minimal inventories. And the only thing that I'd say here is that there's a couple of industry leaders that seem to have excess hydroxide and over the last couple of months have been dumping their hydroxide in the Chinese market and maybe added to the weakness of the hydroxide. But we see temporary issue and structurally really, we see a pretty healthy situation for inventories.
So that's fantastic, Christian. So I mean, do you think now it feels like chemical prices have -- it seems like they're trending more sideways now and spodumene, I guess, is caught up. Is that how you'd see the market? Not asking you to give a price forecast, but just your sense of how the market is now balancing?
Yes. So, you're right in saying that spodumene prices have -- were lagging the reduction in prices, were lagging the reduction in chemicals. And now they have largely caught up. That would be also my observation. We've seen a slight rebound of spot prices after Chinese -- after the Chinese going weak and now some stability. Yes, this is all I can say at this stage.
I'd now like to hand the call over to Andrew Barber for questions from the webcast.
Martin, we're just on time. But if we could take one final question from the webcast and that would be regarding DLE technologies and whether Allkem has been working on DLE technologies, in particular for Olaroz. What that might mean for recoveries and things like water usage, please?
Thank you, Andrew, for the question. Yes, we are working with DLE technologies. We are currently piloting one technology for Olaroz and we're looking into our ability to get good recoveries from that technology. During the next quarter, we will be -- start that pilot project. And we aim from the DLE technologies, the ability to improve the recoveries from the brine. At the same time, we're looking into minimizing the consumption of fresh water. As you know, DLE technologies are quite demanding on the availability of fresh water. We do have enough fresh water. In Olaroz, it's not a restriction in there, but we are looking into that balance also. Our planned DLE technologies may help us reduce overall production costs and mixing it with the current evaporation technology. So that's what we are looking for in Olaroz. And pilots, as I said before, are being conducted during this quarter.
Thanks, Martin. I'll hand back to you for closing comments.
Thank you very much. And as a conclusion, I can tell you that we've achieved another very strong quarter as we continue to focus on operational performance, project execution and managing the cost through our global portfolio. In addition, we continue to work to complete the merger with Livent, which will deliver higher quality and lower volatility of earnings as it will decrease the risk of delivery of the significant growth profile that both companies bring together. Further information will be available with the publication of the scheme document.Thank you for joining us today. And if you have any further queries, please don't hesitate to contact our Investor Relations team.
This concludes today's conference call. You may now disconnect.