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Good day, and welcome to Allkem June quarterly results conference. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I would like to now welcome Martin Perez de Solay, Managing Director and CEO, to begin the conference. Martin, over to you.
Thank you, Paul, and welcome, everybody, and thank you for joining us for Allkem Limited June 2022 Quarterly Results Briefing.
I am pleased to provide an update on our operations and development assets around the globe. Despite a lot of noise in the lithium market and increasing global challenges this quarter, we have concluded the 2022 financial year with record revenues and production volumes generated from our 2 lithium operations. This demonstrates the strength and resilience of our assets, team and the business.
During the quarter, our cash balance increased by over $213 million, and we achieved record revenue of $337 million from Mt Cattlin and Olaroz with a gross operating margin of approximately $292 million. Strong projected cash flow and the $663 million we have in group cash is expected to fund the delivery of our aggressive growth strategy to increase production threefold by 2026.
Our teams continue to advance the development of our project pipeline, and we are on the cusp of significant growth with Olaroz Stage 2 and Naraha to begin production later this year, Sal de Vida in 2023 and James Bay in 2024. This growth strategy is underpinned by the transition to net zero emissions through the electrification of transportation that will require a significant increase of global lithium production -- of global production of lithium chemicals.
This quarter, I am pleased to welcome a number of new members to our executive team who will enhance the delivery of our growth strategy. Karen Vizental has joined as Chief Sustainability and External Affairs Officer. Karen has extensive experience in multinational organizations such as Unilever and will lead corporate sustainability activities, including Allkem's journey to net zero emissions by 2035.
James Connolly has joined as Chief Project Development Officer. James has extensive operating and project development experience and has previously held senior positions with Vale Base Metals and Barrick Gold Corporation. He will assist us on delivering our growth assets.
After successfully heading the sales and marketing function, Christian Cortes has taken up the role of Chief of Staff working closely with me. Christian will utilize his vast knowledge of the business and the lithium industry to support its business functions within the Allkem executive growth strategy.
Christian Barbier also joined the organization as Chief Sales and Marketing Officer. Christian has a long history in sales and marketing of industrial minerals, having held positions with Iluka and Sibelco. He will be assisting us in enhancing our sales and marketing strategy, and he's also joining me on the call today and will provide us with a market update.
Firstly, starting with sustainability, the core pillar of our business. We continued to be recognized for our leading practices and enable to increase our transparency and performance. In June, Allkem become a constituent company of the FTSE4Good Index Series, which is designed to identify companies that demonstrate strong ESG practice measured against globally recognized standard. We also achieved the highest available comprehensive rating in the Australian Council Of Superannuation Investors' annual detailed assessment of ESG reporting in ASX 200 companies.
Having a closer look at our sustainability performance across our operations. Recently, we have achieved our best safety results since becoming a merged entity with a total recordable injury frequency rate of 2.6% at the end of the quarter. This reflects a 23% improvement from the prior quarter and a lost time injury rate of 1.0 for the rolling 12 months. Unfortunately, we did include -- incurred 2 recordable injuries from Mt Cattlin, one more severe than the other, but both contractors have made a full recovery and returned to work. Preventive actions have since been implemented.
Mt Cattlin was impacted by COVID-19 cases at site over the quarter with big case load of the Omicron variant in Western Australia occurring in May. Contractors and personnel followed site biosecurity protocols. Remaining global operations continued to follow biosecurity protocols and the impact of the new virus diminished proportionally to those countries' case numbers.
We continue to maintain regular and positive engagement with the communities at work. Some of our initiatives this quarter include education on the construction of Sal de Vida project and technical and leadership training in both textiles and plumbing.
Moving to our operations. As previously stated, Mt Cattlin was impacted by COVID-19 and the tight labor market in Western Australia. However, we still reach annual [ record breaking ] production of approximately 194,000 tonnes of spodumene concentrate in financial year '22. Heat recovery guidance of 56% and achieved record revenue of approximately $189 million in 1 quarter from shipments totaling approximately 38,000 tonnes. We achieved a gross margin of 84% for the quarter, and we expect margins to remain high with robust demand in the spodumene market and the September quarter pricing that is expected to be better than the June quarter.
Looking into financial '23, the September quarter -- in the September quarter, a number of improvement programs will be completed, including the addition of magnetic separators. Our larger mining fleet will be deployed to site and addition of third-party contractor services will provide further flexibility. This initiative will assist in transitioning to the 2NW pit and enable a ramp-up in our production from the end of the quarter, in line with full year guidance.
This quarter, we also commenced a 3-phase resource extension drilling program to test immediate mine life extensions. As of June -- as of 30 June, we completed 37 holes and 8,690 meters of drilling. An update of results will be provided later in the September quarter. The current drilling program is expected to be completed towards the end of calendar year '22.
Moving on to Olaroz. Annual production reached a new record of 12,863 tonnes of lithium carbonate for financial year '22, 47% of which was battery-grade material. During the quarter, 3,445 tonnes of lithium carbonate were produced and 3,440 tonnes were sold, generating record revenue of $141 million with average pricing of $41,033 per tonne FOB. Sales of battery-grade lithium carbonate represented 45% of the total.
Gross cash margin for the quarter was 90% or $36,732 per tonne. Margins are expected to remain strong with lithium carbonate contract pricing for the September quarter remaining stable. By the end of June, Olaroz Stage 2 expansion had reached overall physical progress of 88% completion, with commitment of ramp-up expected in late second half of calendar year '22.
Evaporation ponds are completed and commissioned. The majority of the wells are now operating and the remaining 3 are scheduled for completion in July. The third lime plant is at final stages of commissioning and start-up is scheduled for the end of July. By September, we expect the fourth lime plant to be completed and the soda ash facilities to be commissioned. Carbonation plant activities also progressed, and it is expected to be completed in the December quarter.
Moving on to our development assets that will underpin significant growth at Allkem. In Naraha, the construction of Naraha lithium hydroxide plant in Japan have been successfully completed. Commissioning activities, including water tested have been undertaken and first production is expected late September with an expected ramp-up period of approximately 12 months.
At Sal de Vida, we made strong progress since construction commencement in January. Construction of the first 2 strings of ponds for Stage 1 has reached over 32,000 completion -- 32% completion with the first pond now filled with brine. For the remainder of the calendar year, efforts will focus on commissioning the first string of operational ponds and commencing the construction of the carbonation plants.
This quarter, we also successfully expanded the camp facilities and had progressed procurement from long-lead items and the tendering process for our 30 -- for our targeted 30% photovoltaic energy solution on site. The Stage 1 scheduled is targeting first production in the second half of calendar '23 with brine evaporation occurring during plant construction, allowing evaporated brine to feed the plant once it is commissioned.
At James Bay, our project in Quebec, Canada, detail engineer progress alongside procurement during the quarter, including awarding key equipment packages. Budgets have been allocated to align detailed planning and construction to commence sometime. The clarification process of the environmental and social impact approval continue with both provincial and federal level in conjunction with the Cree Nation government. And the meetings are planned in July to review the information provided.
We are now targeting construction activities to commence in the first quarter of calendar year '23 with commissioning in late first half of calendar year '24.
I will now hand over to Christian Barbier, who will provide us with sale and marketing update. Christian, welcome to Allkem and please talk to our shareholders.
Thank you, Martin, and good morning, everyone. Markets and customer demand for both lithium carbonate and spodumene concentrates have remained robust during the quarter despite the soft start due to COVID-related lockdown that occurred in China. Sales and production rebounded strongly from May onwards as the lockdowns were lifted. And total EV sales in China for the June quarter were estimated at 1.3 million units. It is up 50% from the prior corresponding period and up 20% quarter-on-quarter. So with 2.5 million units sold in China in the first half of 2022, EV sales are forecasted to increase to a total of 5.5 million units according to CAAM, the China Automobile Association, and up to 6 million units for some observers by the end of this 2022 calendar year. Further EV battery installation volumes were estimated at 52 gigawatt hour during the quarter, which is in line with the March quarter, and up 80% from the prior corresponding period.
In Europe and in North America, overall cash sales have remained weak due to the economic and political environment. But positively, EV sales and EV market share have continued to increase in both regions. The market share of EVs passed 6% in the U.S. since May with 400,000 vehicles sold in the first half of 2022 versus 600,000 for the whole of 2021. And the EV market share remains over 20% in the EU and is expected to increase further as growth is endorsed by government stimulus and policies in support of net zero economies.
So we continue to see strong demand for a range of lithium chemicals, which supports Allkem's diverse product offering. Demand for LFP battery formats, lithium, iron, phosphate, continues to dominate in China, representing about 55% of battery chemistries. Outside of China, we continue to see high nickel cathode as the preferred chemistry with a number of new gigafactories announced in North America this quarter.
Moving to the supply side. We're starting to see increased supply in response to high prices and strong demand. However, we expect demand to still outstrip supply side responses in the coming quarters. The lithium chemical production in China during the June quarter is estimated to have increased by more than 20% quarter-on-quarter, thanks to a higher supply of mineral feedstock first from local sources as weather conditions improved. And second, some high spodumene concentrate imports from Australia.
Indeed, there was a strong increase during the June quarter of spodumene concentrate shipment from Australia to China, 50% higher quarter-on-quarter. And the incremental volume originated from brownfield expansion and from restarts of idled capacity. Shipments in the June quarter will mostly be consumed during the second half of this calendar year. And we expect utilization rates of conversion facilities in China to be boosted, but still not reach full capacity.
Supply security remains a concern for OEMs who have all mostly committed to electrifying their fleets. And as a result, relationships between OEMs and junior miners continue to be reinforced through direct investments in lithium assets. What's clear is that the race to secure key critical materials has intensified further across the EV battery supply chain.
Now for prices. During the June quarter, spot prices for lithium carbonate and hydroxide in China reduced by 8% and 5%, respectively, from the all-time high prices registered in March 2022. This easing is reflective of reduced EV and battery production activities as a result of the lockdown in China in April. Outside China, on the other hand, spot prices for lithium chemicals continued to rally during the June quarter and reached parity with Chinese prices, demonstrating strength in the Japanese and Korean cathode and battery manufacturers.
As far as spodumene concentrate is concerned, spot prices registered record highs during the quarter with prices increasing more than 50% quarter-on-quarter. Despite increased supply volumes from Western Australia during the quarter, supply side tightness is still prevalent as the strong demand from converters will need to source feedstock for their lithium chemical production. Everywhere, contracted prices for lithium carbonate and spodumene have gradually adjusted up to reflect the tight market conditions. And we expect the gap between contract pricing and spot pricing to narrow over time.
For the September quarter, we expect to see relatively stable prices in lithium chemicals, carbonate and hydroxide and a continued increase in spodumene prices, although not as much as what was experienced last quarter. 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 session.
[Operator Instructions] Your first question comes from the line of Joel Jackson from BMO.
A few questions. Maybe I'll go one by one. You're guiding to similar lithium pricing from Olaroz in the September quarter versus the June quarter, so let's say, around 41,000 at a time. That seems from the outside to be a very low realization considering what lagged prices might actually be in September. Can you help us figure out what's going on from a mix perspective? Have you locked any pricing on fixed now? Are you being conservative?
Thank you, Joel, for your questions. Christian, if you could please answer that one.
Yes. Thank you very much, Joel. Look, the first thing is, we have a variety of different lithium carbonate prices or specifications. And the spot price that you see is the price for battery grade and technical grade is a lower price. So we have been selling in the last quarter about 50% technical grade and 50% battery grade.
The second part of the answer is that we are selling on contract price indices, which have not yet caught up with the spot prices. Now having said this, and I think you may remember some of the announcement that we made earlier in the year, we haven't raveled the fixed price contracts that we had at the beginning of this year. And this is why you've seen a pricing increase in the second -- in the first and second quarter.
Okay. If spot prices all stay flat from here, let's just call it, $70,000 a tonne for battery grade, okay, in China and whatever else. Then what should December quarter pricing look like?
Well, at the moment, we do not see any reason for prices to come down. There is strong demand from OEMs and from cathodes and from battery producers. We see most people very interested in securing supply and not particularly concerned about the increase in prices that have happened over the last few months. So there is no -- I should say, I can't make any prediction on future prices. But at the moment, we see strong demand definitely -- sorry, no reason or any degree.
I'm giving you the forecast. I'm saying that spot prices stay exactly the same today as they are for many, many, many months. And should you see a much higher Allkem price realization in the December quarter versus the September quarter?
Well, we will see a continued gradual increase in our weighted average price. And again, Joel, please bear in mind that half of our sales are made in technical grade, so at a lower price. Now the $70 that you quote for battery grade related to the Chinese spot market and a lot of products we sell on contract prices. But you can expect to see a continued -- provided that spot prices we made at the same level of continual increase of our weighted average price.
Sorry, a lot of background noise. My next question would be then, if we think about fiscal 2023 production with all the moving parts, appreciate there a lot, what would you say would be expected fiscal 2023 production for battery-grade carbonate, technical-grade carbonate, hydroxide and spodumene?
We are not giving guidance at this stage on Olaroz production for 2023 as not given in the previous year, particularly because we will be ramping up on Stage 2 in the second half of this financial year. But for Stage 1, we're thinking it's going to be along the same lines what we saw in financial year '22.
Okay. That's helpful. And then my last question would be the inventory situation in China. What is it like? Like, we know that we had very little inventory of lithium in the inventory -- in the system. Is it now a bit better? And I also asked a question, which is, if lithium inventory is just a little bit better, but it goes up from being basically 0, does that take some of the pricing power away from the suppliers? Like just having a little bit of inventory in the system versus having none because we have an outstanding pricing now. Does that make a big difference in the pricing power prices like [ yourself might have ]?
Christian, could you please take that one?
Yes, I'll take this. Well, Joel, I think the lockdowns that occurred in China around Shanghai and Eastern China in April gave part of the answer. There was a softening of the price of the covenants and hydroxide price in China fairly relative during the month of April. But demand has picked up in May and June to previous levels. So stocks in China are still pretty tight and demand also in Korea and in Japan is very strong at the moment.
So again, the buying power, I'm not sure I would measure it like this. The end demand from OEMs remains quite strong and everybody in the supply chain, and we've seen that at the beginning of -- at the end of June, as the first conference where everybody gathered since the end of COVID, everyone was there. And across the supply chain, the production of lithium was being consulted by everybody 3 times over in the supply chain from the cathodes, the battery and the OEM producers.
So basically, what is driving the demand is the growth in EV registrations, EV sales and this will continue. The lithium industry is trying to catch up with demand and there's -- the demand is so strong that all the projects that are coming out are necessary to meet demand.
Your next question comes from the line of Reg Spencer from Canaccord.
I just wanted to follow on from Joel's question on pricing. If I look at, say, Asian Metals, FOB Chile, prices are being reported at $60,000 a tonne, China spot pricing, whether it's technical grade or battery grade somewhere between $60,000 and $70,000, and you guys are guiding to highest spodumene prices again in the September quarter. How do we -- is this -- again, I don't mean to lever the point, but is this really just a product mix issue, that difference between what you're suggesting is spot pricing Q-on-Q and where the rest of the market seems to be trending to?
Thank you, Reg. I'll let Christian explain more in detail on that. My quick answer to that is, it's a mix of product mix and contract duration and on contractual. Perhaps Christian, please expand on that one.
Yes, absolutely, Martin. And Reg, I would add to this that there is some inertia in our contracts. So when prices increase, there's a lag for us to see the increase in our contracts. But again, I mean, I can't really comment on the FOB Chile price. But the spot prices that you see in China, like for all these statistics, they are not representative of the whole market of the weighted average price of all transactions in the market.
Okay. I might just sort of across to -- and maybe one for Neil, if he's there. We can see that Argentinian inflation is running quite high. I think it last -- from I looked, it was annualized at like 75% and that does appear to be outpacing the rate of depreciation in the peso. Can you remind me how much of your cost at Olaroz are denominated in peso. And did this disconnect between inflation and peso depreciation mean we can expect some upward lift on costs over the next little while?
Reg, yes. I mean, just in terms of the split for all intents and purposes, about 50-50 split, USD versus peso. And in terms of increased costs, that's why you're seeing our costs are remaining, which we're keeping under control to the best extent that we can with a big focus on them in the low 4,000s but we are seeing energy, labor, et cetera, and other reagents increasing.
So whilst there is a focus to keep a lid on cost to the best extent possible, there are certain things that are out of hand, as I mentioned, energy, labor, gas. But as you mentioned, inflation is outrunning devaluation. And when that's -- over time, we've seen devaluation catching up with inflation, but we haven't seen that for the last 18 months.
And I think to your point...
Sorry, Martin, you go.
Sorry, Reg. I was going to tell that in spite of the significant spike in inflation that we've seen and some of energy and reagent cost going up, we've seen Olaroz are being able to keep a stable production and reasonable cost evolution throughout this difficult situation in the market.
Yes, yes. Understood. And I presume it's too early to say how long the situation is going to persist. But obviously, there's some global macroeconomic factors at play which are obviously outside of your control. But needless to say, costs are probably going to be a little bit higher over there at least the short term.
Yes. That's it, Reg, exactly.
One last question for me, if I may. At Mt Cattlin, are you able to provide a yearly strip ratio profile for us over the next couple of years? If I look at your cash cost guidance at Cattlin next year, obviously, you've got some disruptions from COVID, labor availability issues, energy costs are higher. Just wondering if you can help me out in connecting the dots and with some strip ratio guidance?
Sure, Reg. I would ask Keith Muller.
Yes, Reg. For FY '21, stripping ratio is 12.7%. We compare that to FY '22 where the stripping ratio was about 1 in 6. So quite a significant increase as we bring that Northwest bid down. As we move into FY '24, the stripping ratio reduces to a 1 in 2 again. So really, over the next 12 months is when we see a very significant effort in pre-strip and that almost diminished to nothing in the following year as we then have opened the entire ore body in the Northwest.
Okay. Excellent. And in terms of your mining unit rates there, I guess, it doesn't really matter given that margins at Cattlin are so strong, given where current spodumene prices are. But you are seeing some upward pressure on those unit rates at Cattlin at a time when you go through such a high strip period. And do you expect that to normalize as we move beyond FY '23 and into '24?
The unit rate for mining as a single activity is actually reducing due to the increase in mining volume. The unit cost on a dollar per dry metric tonne produced associated with the mining activity, absolutely, yes, there is a significant increase in that. And largely, the bulk of the increase in operating costs we're seeing in FY '23 is purely associated with this increase in stripping ratio. So as the stripping ratio reduces to 1 in 2 in FY '24, we anticipate the unit operating costs to follow suit, and that will come back down to about USD 300 to USD 380 a tonne in FY '24.
[Operator Instructions] Your next question comes from the line of David Deckelbaum from Cowen.
Perhaps if I could just go into the [ weeds ] a little bit on Mt Cattlin. I understand the guidance, and that was quite helpful around cost per tonne coming down in '24. Curious as you guide the fiscal year volumes for next year of about 165,000 dry metric tonnes, that's using -- assuming a lower ore grade, obviously, of 0.93% to 0.94%. The guidance for '24 is at 1.17% rate. You also mentioned in the release that you've increased your mining capacity there. So should we be assuming that there is greater dry metric tonnage in fiscal '24 relative to '23?
Keith, please if you could answer that one.
Certainly. Thanks for the question, David. Yes, there's a direct correlation between head grade and final spodumene production. So in both fiscal year '23 and '24, the mill is running at full capacity. So we're processing 1.8 million tonnes of ore in both those financial years.
So with a higher head grade in FY '24 of 1.17% compared to the 0.94% in '23, we do expect to see that incremental increase in spodumene production. It's a twofold win for us, not only do we get better metal recoveries at a higher head grade, but there's also more metal in the feedstock that we can then beneficiate. So yes, we do expect '24 spodumene production to increase in relation to the higher head grade.
That's quite helpful. And just to understand more around the extension of mine life programs at Cattlin, you'll have data from the drilling program at the end of this calendar year. When would we expect results from that program to be implemented into the mining process? Is that the reality for a fiscal '25 program? Or how do we think about the program beyond '24 at this point?
Martin, you're okay if I take that?
Yes, please.
Yes. So that's right. We'll have the results from the current resource infill drilling by the end of this calendar year. And that will enable us to finalize and formulate a feasibility study to get to FID very early next calendar year. So around March, we would be looking to guide on whether an expansion beyond the current life of mine, which is towards the end of 2025 whether that's going to push out.
What we anticipated and as we released in our Strategic Day in April, is that this current infill drilling we're doing will push the mine life out to 2028. And then over and above that, we're also looking at brownfields areas around existing facility for an underground -- potential underground operation post-2028.
Got it. And then just a last one for me just so I understand from an operational perspective. The addition of mining equipment, loading facilities and the like, is that merely to help with the strip ratio going into '23?
Look, if we didn't lose this mining volume in the last 6 months as we work through COVID restrictions and a tight labor market, we probably wouldn't have increased the mining fleet. So what we are doing with the increase in mining fleet and also adding an additional mining contractor to diversify our risk profile, that's just to catch up on some of the lost volume. So we have a continuous ore supply through this coming financial year.
Your next question comes from the line of Hayden Bairstow from Macquarie.
Just a question on Argentina. I mean obviously, the inflation and the FX is moving around. Just keen to understand what you're seeing on broader inflation given there's a lot of increase in activity in Argentina and how you're tracking on CapEx? And have you got any concerns going forward as activity in that country steps up, whether you can complete these expansion sort of as you're traveling.
And also, can you provide any comments just on the government's capacity to continue to push through all these approvals given, as I say, activity in the amount of the projects that are sort of arriving and being planned are starting to increase?
Well, thank you, Hayden, for your question. With regards to the overall inflation situation in Argentina, it's currently stable at the number Reg was mentioning. Looks like market is forecasting 60%, 70% of inflation in the year and the catch-up of the conversion of the FX rate is going slowly. As Neil was mentioning, we are being able to continue with our investment profile and we are hedged from an investment perspective because our exports are being used to pay the imports on the CapEx program and the local expenditures in pressure terms are somehow matching the inflation with the devaluation of the local currency.
In terms of approvals, we do have all approvals in place to continue with our expansion projects in Olaroz and the construction of Sal de Vida. So I'm not sure whether that answers the second part of your question, but I understood that, that was where the government was going to be able to issue all required approvals. Neil, if you want to complement something on the local FX, currency and inflation situation?
No, the only thing I'll add is, look, we manage that very carefully on the ground, as my team knows better than anyone that's based in Buenos Aires. But just in terms of our CapEx, yes, we're locking in a lot of items in U.S. dollars and early -- as early as possible as well. So a lot of the longer lead items have been locked in earlier and everything is USD-based. And given we're a USD-based company with all our sales in USD, we are protected from that perspective, just the peso costs which we've got to manage, which there's an extreme focus from the entire team.
Okay. Great. And just on James Bay, can you just provide an update on how the process is going there. Are we seeing any sort of headwinds within Canada in terms of pushing through all the required approvals and everything?
Well, more than that. I think we had some headwinds in the last few months with the strike of engineers in Quebec that somehow delayed the preparation of COMEX meetings, now meetings with the COMEX that is a joint body between the Cree Nation and the provincial government of Quebec scheduled to happen during the month of July, and we expect to start to see some tailwinds as the strike of engineers in Quebec have terminated and things are returning back to normal on that front.
In the meantime, we've been able to continue to progress on engineering and the progress in the purchase orders for long-lead items and securing contractual servicing that we need to start the construction in the first quarter of the next calendar year.
Your next question comes from the line of Matthew Frydman from MST Financial.
Martin and team, just wanted to follow on Hayden's question about the project construction environment in Argentina. Obviously, a few number of projects in various stages of development and completion. So really just wondering what sort of challenges, if any, you're having particularly sourcing construction workforce, technical expertise, rigs to drilling wells, pumping equipment, any other specialized equipment. Presumably, all of those things are in pretty high demand and then probably compounded by COVID and supply chain issues. So just wondering if you can expand on where if anywhere you're having challenges and how you're managing the critical timelines for the projects you're undertaking.
Well, I think this is no news for you. It's -- construction in this industry is challenging across the board. So to split the program in various parts, I'll tell you what we are doing and how are we managing it. First of all, we announced this quarter, we significantly strengthened our management team with 3 new positions, particularly with regards to project and bringing James Connolly with a wide experience in the project engineering and development coming from various new positions in Vale Base Metals. James is helping us to improve our engineering designs and our readiness to construct.
In terms of construction itself, 2 firms. So we are constructing currently in Argentina and getting ready for construction in Canada. In Japan, plant is already constructed and we're already starting the commission, the finalized testing and starting commissioning phase. In Argentina, we are 88% plus progress in Olaroz, and we are about 30% progress in the construction of the ponds in Sal de Vida and close to 15% overall project. So we are shifting some contractors and experience from Olaroz into Sal de Vida, and that's enabling us to continue to manage the experience that we acquired in Olaroz and deploy that in Sal de Vida.
But also, as we said before, we're bringing in an education fit into the LATAM industries from other industries that are compatible to ours. Particularly chemical industry and oil and gas industries that have been quite large industries in Argentina somehow have reduced the level of activity via very good professionals into this industry.
In Canada, we teamed up with a local engineering contracting firm in Quebec that is helping putting together all the necessary contractual arrangements with our team in the office of Quebec. So the way we are managing the risks of construction project is by localizing our workforce and taking advantage of the local capabilities and also taking advantage of the knowledge that we get in the different projects.
With regards to particular situations or challenges to construction in Argentina, I would tell you that they don't go beyond what we just discussed. And the fact that we are very well progressing in Olaroz and helping to leverage construction at Sal de Vida from the experience and the contractors in Olaroz, it has been very helpful. And I think that puts us ahead of other projects in the region.
Yes. Thanks very much, Martin. Your last comment there picked up on what my follow-up question was going to be, which is that have you heard or is there anecdotal evidence of some of the other projects in the region being particularly challenged by some of these issues? And conversely is Allkem will be better positioned because of some of those factors that you've highlighted?
Yes, [ interesting from that ], I think we are better positioned than other competitors in the region to be able to contract basically because we've been building, constructing and delivering projects for quite some years right now.
Yes. Great. My only other follow-up question was on Mt Cattlin and particularly on recoveries. Clearly, in the June quarter, part of the drop in production and also the stuff like the unit cost was because of that step down in recovery. You highlighted basalt in the stockpiles as a contributor there. Can you talk a little bit about the impact of lower head grades also and particularly as we look into FY '23 guidance, if I run some rough numbers, guidance seems to reflect an improvement in recovery back to that sort of 55% to 60% range. But clearly, you're also guiding to a lower head grade. So I guess the question is, are you confident that recoveries will improve back into that range. Are you confident that you can solve the basalt issues also despite the impact of the lower head grade?
Keith, can you please comment on that one?
Yes, certainly. Matt, I think one of the biggest things that we realized this quarter was that low-grade stockpiles that contains the basalt is something that we probably wouldn't have processed until the end of life. The reasons we reverted to processing that feedstock is to keep the mill full and capitalize on the current pricing mechanisms that we have in the market.
So with the delay we've had in stripping, we were forced to go and process that lower-grade basalt containing stockpile. So to answer your question is, as we recover and we enable a pre-stripping to take place in Northwest, we will divert away from processing that lower stockpile. So yes, we expect recoveries to return to that 55% as we start processing clean uncontaminated ore.
Got it. But obviously, with the lower head grade forecast in FY '23, I'm assuming that some of that is still a component of those low-grade stockpiles and really the benefit of stripping probably doesn't help at all late FY '23?
Yes, that's right. So if I can just give you 2 data points to sort of draw correlation between recovery and head grades. So if we look at say, a 6% SE final product grade at a 1.4% head grade, you're looking at a recovery around 62%, whereas at a 1% head grade that material will only recover at about a 56% head grade. So yes, some of the lower recoveries is associated with the lower head grade just due to the great recovery curve.
Your next question comes from the line of Lachlan Shaw of UBS.
So just to stick at Mt Cattlin for a moment. June quarter costs are just a touch over USD 800 per tonne, almost double FY '22 average, but you're guiding for FY '23 cost to be up a fair bit. Is the June quarter data point a good starting point for sort of early FY '23 in terms of costs? Or should we be thinking about a little bit less than that?
Yes. So I think that's a good starting point to estimate the cost going forward. In the June quarter next year, so 2023 is when we will see the cost reduce again. I think before I mentioned in FY '24, we expect the unit operating costs are back at the USD 380 levels. So it is just a stripping that we are doing in the next 9 months that's pushing that cost up. All other costs related to the operation has had very minor increases that relates to inflation. It's really the mining cost that's seen this significant increase. As we mentioned, almost double in unit operating costs.
So it's a bit of a -- it's a perfect time to do this. We wouldn't have been able to do this 18 months ago. So we're just capitalizing on the current market prices to get pre-stripping and to get the higher -- highest stripping ratio puts out of the way.
Got it. Understood. And then just on to Olaroz. So no guidance for FY '23 in terms of production. We've seen -- pointed out earlier because of the ramp-up of Stage 2. How should we be thinking about that? Last time you guided on that, you were signaling a 12- to 18-month ramp-up to 25,000 tonnes nameplate from first production end of 2022. Is that still how you're thinking about it? And I guess just wondering why the guidance has been removed.
Indeed, it is that's how we are thinking about it, it's keeping the same guidance in terms of [ one point ] that we gave before. And it's very similar from what we saw this year for Stage 1.
Okay. Understood. And then my final question, if I may. So we talked before about carbon pricing, the spread between technical grade and battery grade, noting a sales split of roughly 50-50. What's your observation on that spread? Is it a constant dollars per tonne amount? Is it a percentage of the battery price? And I guess, is that spread changing given all of the shifts in broader pricing and market dynamics recently?
Christian, I'll let you answer that one, please.
Yes, Lachlan. Look, it's a fair question. The spread is not a fixed premium. It fluctuates as per demand. Generally, you probably would be well versed to say it would be about $15,000 a tonne. But it really depends on the supply and demand. And ultimately, most of the demand comes from the battery. So people upgrade carbonates into either hydroxide or into technical grade -- sorry, battery grade carbonate.
So ultimately, when the market stabilizes over the next few quarters and months, we expect to see battery grade significantly or consistently higher than technical grade. But again, month-on-month, it depends on the supply and demand and especially in China.
Your next question comes from the line of Kate McCutcheon from Citi.
At Olaroz Stage 2 production in the back end of this FY, I guess at the Investor Day in April and even last quarter, you'd said first production in this current half are in now. So what's driving -- what are the key reasons for the delay here? What's happened between the last quarter and this one that, that first production from Stage 2 has been delayed?
We are continuing to progress with the construction of Olaroz. As we highlighted in the report, there are some disruptions in the transportation industry that created some delays in some equipment arriving. So we'll be a bit more conservative in terms of the time it would take us to complete the project. But we're still maintaining our guidance that we were going to get some production at the end of the second half of this year, which is what we are doing.
Right. Okay. So sort of to clarify first production, the end of CY?
Yes, we said CY.
Okay. Right. I understand. And then just on Cattlin guidance, two questions. Is all of that waste stripping that you're doing sitting in OpEx? And secondly, can you give me an idea of how much of June quarter costs and guidance for next year is cost inflation? Any metrics you can point to there?
Neil, can you please update on that one, please?
Yes. I mean on the first point that you asked, it's not all sitting in CapEx. What we're doing is capitalizing lower burden and that will be released as we produce. So it's not all in CapEx, there is a portion of it that's in CapEx, but not -- or sorry -- in OpEx, I should say, in OpEx, but the rest is being capitalized and will be released as the production occurs. But it's in quite a short period because of the mine life. So it's not that it's over a very long period that it occurs. It's capitalized upfront and then released fairly quickly. Keith, as to the second question, I think you can pick up.
About the cost inflation, so about $800 a tonne, do you have an idea of what dollar per tonne is like a diesel increase or labor?
Keith, but go ahead if you've got it. I mean -- sorry, I just missed the question. I can pick that up as well unless you want to go. I mean it's -- just from my -- sorry, Keith, I've got across you, but there's been lower production volume, lower recovery reserves as we've mentioned, there's the strip ratio to an extent as well as the skilled labor issue in WA. Keith, I don't know, you'll be close to being at the mine to add anything that I haven't covered there.
Sure, Kate. I think -- if I can get back to you with an exact number, but I take your question as you're trying to get a feel for what is related to the increased mining volume and what is related to general inflation. So if I can just give you a bit of a flavor of that, I'd suggest that almost 80% of the cost is associated with an increased mining activity and a very small portion is associated with the increase and inflation due to general higher cost of consumables like fuel, ammonium nitrate and other reagents that you use. So very small component is associated with general inflation.
Okay. And so then why are you faring better than peers? Have you got diesel hedged or I mean you're moving a lot of tonnes or is it the contracts?
Sorry, can you clarify that question, Kate? I don't understand what you're asking.
Well, a lot of our peers even today have come out citing huge increases just in diesel alone in terms of dollar per tonne numbers and also for labor. But it seems like you're faring a bit better. So is this the way your contracts are written? Do you have some diesel hedged there? Or you're just not seeing?
Sure. So no, we don't have any diesel hedged. I can't compare with our peers. I haven't done a proper evaluation of why they are citing much higher inflated costs. To give you again a feel of diesel, we consume about 12,000 liters of diesel a month. So there's about an $18 million increase due to diesel over [ $180 million, $190 million ] spend over the financial year. So that is -- that's probably the most significant consumable increase that we've experienced because we also use diesel for our power generation.
Your next question comes from the line of Glyn Lawcock from Barrenjoey.
Just coming back to Mt Cattlin, just on a couple of aspects. Back in June, you guided to $5,000 a tonne for the spodumene on an SC6 grade, but you received it on SC5.4. Was that -- that's effectively a 10% lift. Was that just better pricing in the month of June that you got or discounts narrowing?
And then just while we're on Mt Cattlin, just the guidance for '23. Does the spot grade production, you produced 5.3 product in the quarter of June. Given you're going through the stockpiles, et cetera, should we expect a low-grade spot in fiscal '23, and then it bounces back in '24. And just what FX rate is assumed in your cost guidance as well for Mt Cattlin?
Thank you, Glyn, for your questions. I'll ask Christian to answer you on the pricing. And with regards to recovery rates, Keith will amplify the question but the recovery rates are basically associated with the head grade that was striking the mine. Christian and Keith afterwards quickly, we're running out of time.
Yes. Thanks, Martin. Well, Glyn, yes, we did achieve a bit better price than what we expected. As we mentioned earlier, spot prices for spodumene have increased and we've managed to take advantage of the pit site to be lower than [ producing ] grade.
Glyn, if I can just answer the last question you had that relates to product grade and whether we're expecting to see the same 5.3, 5.4 for the financial coming. No we don't. This quarter we'll see a lower grade as we are moving through those lower growth stockpiles. But from the December quarter onwards, we can return to any grade we wish to, 5.5 up to 6 at our customers' demand. So it's not a long-term situation we find ourselves in.
Okay. And the FX rate you assume for this year, maybe that's one for Neil.
FX rate for the year, we've assumed is $0.70 to the U.S.
All right. And if I quick, just in order of time. Neil, while you've got the floor, the export tax, you left it out of the release. Do you have that handy what the export tax was in the quarter for Olaroz?
Per tonne, I might have to ask Andrew, if he has that. I don't have that at hand. I don't have that at hand. Glyn, I can come back to you afterwards. If you just have that with me, I'll come back to you on what the export duty was per tonne.
Thank you. Due to time constraints, we will be closing question and answer there. And I would like to hand back over to Martin for closing remarks.
Thank you very much, Paul. At the end of our financial year, I am very happy to report that the integration of [indiscernible] has gone very well, significantly. Significant value has been delivered by combining the 2 businesses and set of assets such that Allkem is in a unique and robust position to capitalize on the growth in the lithium market. We have outlined an exciting strategy to deliver the scale and product stability required by the customers as the world transitions to a new economy. In achieving this, we must also continue strong operational performance, investing in our people, developing our assets in a sustainable manner and managing costs in this inflationary environment. Further, we retain a robust financial position with strong positive cash flow over the quarter and financial year that will fund the stripping of our production by 2026.
Thank you for joining our quarterly results briefing today. If you have any further queries, please don't hesitate to contact our Investor Relations team. Thank you.
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