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IGO Ltd
Earnings Call Analysis
Q1-2024 Analysis
IGO Ltd
Improvements in logistics, marked by enhanced trucking and road availability, enabled the recovery of free cash flow, which reached $30 million for the quarter. This is a significant turnaround from a $5 million outflow in the previous quarter. The company is focusing on cost optimization and operational efficiency, particularly at Forrestania, as it undergoes a transition toward the end of its lifecycle.
The company demonstrated a commitment to safety with a continued reduction in Total Recordable Injury Frequency Rate (TRIFR). The focus on sustainable safety improvements aligns with the broader goal of ensuring safe operational conditions. Alongside these achievements, the company recorded exceptional free cash generation, with a quarterly record of $530 million resulting from robust operational performance and dividends received from TLEA, amounting to more than $1.8 billion cumulatively.
Despite achieving a record production of over 400,000 tonnes of spodumene concentrate at Greenbushes, which has enabled lower cash costs, the company is braced for a likely deferment in sales amounting to a 25% reduction for the December quarter due to volatility in the lithium market. To address the shortfall in elected volumes, shareholders are engaged in active problem-solving to chart a course forward.
At Cosmos, significant progress in project development has been realized, including the completion of a shaft and a focus on installing hoisting and loading structures for upcoming quarters. Additionally, a thorough review of the project, previously announced, is nearing its end with a market update expected before the end of December, which will provide valuable insights into project viability and future prospects.
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Thank you for standing by, and welcome to the IGO Limited 2023 September Quarter Webcast. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to Mr. Matt Dusci, Acting Chief Executive Officer. Please go ahead.
Thank you, Darcy. Good morning, everyone, and welcome to our September quarterly operating and financial result call. Joining me on the call today is Kath Bozanic, our Chief Financial Officer. Slide 2 highlights our cautionary statement and disclaimer. Of note, all currency amounts are in Australian dollars unless noted otherwise.Turning to Slide 3. To begin this call this morning, I would like to note the improvement in safety performance recorded over recent quarters. We are continuing to ensure we have the right safety culture, we are focused on critical risks, we strengthen our safety systems and ensuring people have the right skills and training to do their job safely. Our people are our priority and will continue to drive a culture that supports their safety, well-being and engagement-ness. I'm positive that the results we will continue to see include improvements in safety performance.Turning to Slide 4 and to a high-level summary of the quarterly results. Financially, we delivered another record quarter of free cash flow, principally driven by continued strong cash generation from our lithium business. This enabled us to make a final dividend payment of $454 million during the quarter, while continuing to build a strong balance sheet position. Operationally, Greenbushes was a key highlight, delivering another record quarter of spodumene production and lower cash costs, while continuing to advance the newest growth projects.Our nickel business experienced a softer quarter. We always expected the quarter to be lower. However, this was coupled with some operational challenges, delivering lower-than-expected production, which flowed through to higher cost. Our review of the Cosmos Project is progressing well. It was also pleasing to see the exploration success we had in the West Kimberly, we have discovered massive sulfide at the Dogleg nickel-copper and cobalt prospect. On sustainability, a key highlight was IGO's membership of the United Nations Global Compact, symbolizing our commitment to responsibility and sustainable business conduct.Turning to Slide 5, we will provide an overview of our September quarterly financial results. Revenue, which I remind you, only reflects quarterly revenue from our nickel business, rose marginally to $248 million. IGO share of TLEA net profit was lower quarter-on-quarter at $328 million, reflecting lower lithium prices realized in the quarter. Our underlying EBITDA result was $362 million for the quarter, which is lower than the June quarter result due to lower lithium prices already mentioned. Despite this softer earnings result, underlying free cash flow of $530 million for the quarter was a record for IGO and reflects the lagging nature of dividends versus earnings within the TLEA business.Cash at the end of the quarter rose to $804 million as did our net cash position of $444 million despite paying a dividend of $454 million. We have seen some near-term volatility in the lithium sector, which is likely to have an impact on Greenbushes' sale in the December quarter. I'll talk to this later in the slides. Turning to Slide 6, where we reconcile our cash quarter-on-quarter. As with the last quarter, the big driver was tax uplift with a record quarterly dividend received from TLEA of $578 million. Other points to note here include the $454 million in dividends paid to IGO's shareholders during the quarter, $98 million invested at Cosmos, which I'll discuss later and the continued free cash generation from our nickel assets at Nova and Forrestania of $88 million and $30 million, respectively.Turning to Slide 7, where we displayed the quarter-on-quarter movement in net profit after tax. As you can see, the key driver in net improvement over the quarter was the absence of the impairment recorded at the prior quarter result. You can also see the lower contribution from Forrestania and the lithium business, offset somewhat by some favorable tax adjustment driven by accounting of TLEA's profits and dividends. Net PAT for the quarter was $392 million.Turning to Slide 8, where we will move on to a discussion on the lithium business. This is held via our joint venture interest in Tianqi Lithium Energy Australia referred to as TLEA. Turning to Slide 9. As mentioned earlier, our lithium joint venture has continued to drive strong financial returns to IGO with record dividend flows from TLEA of $578 million for the quarter, up 37% from the previous quarter. This brings the total dividends received from TLEA to above $1.8 billion, which is the equivalent to investment we made to acquire our interest in TLEA just over 2 years ago in 2021. IGO's share of TLEA's net profit after tax was $328 million for the quarter, which was lower than the prior quarter as a result of lower lithium prices.Turning to Slide 10 and on to Greenbushes. Higher feed grades and improved recoveries at Greenbushes drove 5% stronger production compared to the June quarter. Industry-leading cash production costs at $260 per tonne were lower quarter-on-quarter as a result of the improved unit production and lower mining cost. Sales revenue was down this quarter due to lower realized spodumene pricing flowing into lower EBITDA for the quarter. However, a note that the EBITDA margins continue to remain strong at over 90%. The realized spodumene price for the September quarter, including both chemical and technical grade product was USD 3,740 FOB Australia per tonne. This compares to USD 5,431 per tonne received in the June quarter.Turning to Slide 11. The bars on the left demonstrates the continued growth and optimization that Greenbushes has delivered in recent years. Future production growth will be supported by CGP3, which is expected to be commissioned in 2025. Over the quarter, structural concrete and bulk earthworks advanced with the completion of electrical and instrumental design and contractor mobilization occurring post quarter-end. In [Technical Difficulty], other capital work programs continued with a focus on the Tailing Storage Facility 4, mine service area, power supply and accommodation villages during the quarter.Before moving to Kwinana, I want to briefly comment on the lithium market conditions generally and the likely impact they will have on sales at Greenbushes in the December quarter. In recent months, we witnessed softening of lithium prices, a distortion in the spodumene versus chemical price dynamic and some supply chain suggestions, especially out of China, driven by sentiment, driven by and destocking. IGO believes this volatility is near term and the long-term structural dynamics supported by strong demand and constraints on supply will continue to play out. This volatility had an impact on Greenbushes in which TLEA has elected to take a lower allocation of spodumene concentrate than they are entitled to from the Greenbushes during the December quarter.This lower election reflects lower volume requirements of our partner TLC. This will flow through as a likely deferral of sales in which IGO expects to report approximately 25% lower sales in the December quarter from Greenbushes. Shareholders are currently working through mechanisms to manage in the unmet allocated volumes should market conditions remain challenged and requests for products are below forecast production going into CY '24. We are confident our guidance is not impacted as shareholders work through solutions to manage this excess volume over the short term given recent market volatility.Moving to Slide 12, we'll provide an update on Kwinana Lithium Hydroxide Refinery. At Train 1, while we achieved improved production of 607 tonnes for the quarter, performance remained below expectation with multiple blockages and material handling issues resulting in additional downtime to allow for remediation work. I do note that Train 1 did operate at nearly 40% nameplate capacity for several consistent day runs, indicating we are progressively debottlenecking the facility. We are currently in a major shut and expected to be ramping up production as the team continues to work towards achieving 50% nameplate by the end of December. Train 2 is also progressing. This quarter, we advanced the review confirmation of the front-end engineering and design contracts. FEED completion will follow in mid-calendar year '24.Turning to Slide 13, where we'll move to a discussion on our nickel business. I'll start with Nova operation on Slide 14. Quarterly production was down across all metals this quarter, although a reduction in production was planned for the quarter. Nova's operational performance was challenged by production sequencing moving towards lower grade stoping blocks combined with several operational issues including paste fill and nickel reconciliation. While with the lower nickel production, cash cost performance was unfavorably impacted. September quarterly cash costs were $4.18 per pound compared to $2.60 per pound in the prior quarter. Revenue and sales were also down this quarter resulting from lower nickel prices. It's important to note, however, that the quality of the earnings and EBITDA margins remained extremely strong at 57%.Turning to Slide 15. At Forrestania, we transitioned to campaign milling during the quarter, which combined with the seismicity at Spotted Quoll, resulted in lower milled tonnes with lower feed grade and lower production rates. As a result, cash costs were higher quarter-on-quarter at $11.64 per pound. Also impacted by the introduction of a new contract haulage rates during the quarter. Sales revenue was markedly higher at $86 million, up 93% quarter-on-quarter as a result of improved trucking and road availability. This flowed through to a recovery of free cash flow generation of $30 million for the quarter compared to a cash outflow of $5 million of last quarter. We are continuing to assess opportunities for optimization and cost [Technical Difficulty] at Forrestania, as the operation transitions towards end of life.Turning to Slide 16, and on to Cosmos, where we continue to make solid progress on key work streams while the project review is ongoing. Notably, works during the quarter included the advancement of early commissioning activities for the processing plant with the completion of all works expected in the coming weeks. Further, I'm pleased to say that earthworks commissioning of the processing facility and expect first concentrate shortly. The shaft proper was completed during the quarter with a focus on installation of shaft hoisting and loading structures over the coming quarters.Simultaneously, the head frame and winder scopes are nearing completion with scopes for underground crushing ore silos and on the lift on the tailings storage facility, both successfully completed during the quarter. Capital expenditure for the quarter was $106 million, with expenditures split roughly evenly between mine development and project infrastructure capital. The project review, which we announced a few months ago is nearing completion and we expect to update the market before the end of December.Turning to Slide 17, where I'll provide a brief update on exploration activities for the quarter. Exploration activities continue across our portfolio with several interesting developments made as we progress on our journey to discover it. Activities of note, which occurred during September quarter include successful drilling at the West Kimberley prospect with massive sulfides intersected at the Dogleg nickel-copper prospect. Further drilling is expected this quarter to test additional conductors.Diamond drilling also commenced at Ironcap prospect at Forrestania, with 2 drill holes intersecting spodumene bearing pegmatites up to 30 meters in downhole thickness. Further drilling will continue in the December quarter. And finally, our partners, Buxton announced some positive drilling success at the Copper Wolf Prospect -- Project in Nevada in which IGO holds an earning right for up to 70% of the project. While at an early stage, the team encouraged by evidence of a large copper moly mineralized system at the project.Turning to Slide 19, before wrapping up the call, I'll provide a brief summary of our September quarterly results. Slide 20. In summary, we are pleased to achieve further reduction in TRIFR safety metrics over the quarter and continue to quote sustainable improvements over the last year. We have delivered exceptional free cash generation with record quarterly free cash flow of $530 million and record dividends received from TLEA being in total dividends received from TLEA to over $1.8 billion. This has translated into strong cash generation and a net cash position of $440 million despite a record IGO dividend payment of $554 (sic) [ $454 ] million made during the quarter.Exceptional Greenbushes production with a record of over 400,000 tonnes of spodumene concentrate produced this quarter, driving lower cash costs, while continue to focus on expansion production at Greenbushes. While we note the ongoing volatility in the lithium market, there is a likely deferral of sales by 25% for the December quarter. All shareholders are working through solutions to deal with the shortfall in elected volumes. Nova and Forrestania had a softer quarter with some operational challenges. FY '24 guidance remains unchanged. While at Cosmos, we have continued to progress project development, while the project review is continuing, we will update the market on the [Technical Difficulty] outcomes in due course.Thank you for joining the call this morning, and we'll hand back to the operator for questions.
Thank you. [Operator Instructions] Your first question comes from Hugo Nicolaci from Goldman Sachs.
Just one on Greenbushes in the spodumene market, please. I mean, you've highlighted that TLEA is likely not take their full entitlement in December and project partners maybe not taking their full entitlements in March. Can you give us some more color on how much of that is the weaker outlook and the ramp-up for Kwinana and Kemerton or is it a way for the JV to maybe force a renegotiation on that pricing mechanism because they're buying Greenbushes volumes above current spot pricing?
So, what we talk to is TLEA elected not to take its full entitlement for the December quarter. And as a result of that, we'll see lower sales going out in the December quarter, about 25% less than the production. What that means is the shareholders are working through what we do with that shortfall in nominations. We remain confident that it won't actually impact any production going forward. It's just about a mechanism to deal with that shortfall fillable volumes that we're dealing with at the moment. This is largely driven by China and the volatility that we're seeing in the market.
Maybe just to clarify on that one. I mean, is there anything in place that allows the JV to renegotiate that pricing mechanism so that maybe offtake volumes can increase in the second half next year; i.e., can the pricing mechanism fall to the point where it's still economic for JV partners to be taking volumes rather than paying a 20%, 40% premium to current spot spodumene prices?
There is multiple mechanisms that we're working through. The easiest mechanism in the short term is just to stockpile and material. So, we're working through those additional mechanisms within the Windfield joint venture structure to deal with those short-term volume barriers.
Your next question comes from Rahul Anand from Morgan Stanley Australia.
I will firstly perhaps ask a follow-up on the back of Hugo's question, and then ask one on Nova, if that's okay. For the follow-up, just following on from that discussion, I wanted to understand in terms of the contract volumes, how do they work? I mean are these set at the start of every quarter? Or are they set at the start of every month or every year? And I mean, what type of flex do you have within these contracts in terms of changing the allocations like what we're seeing at the moment? I'm just trying to understand whether like Hugo was saying, you definitely need a change in the pricing formula to be forward-looking for these volumes to move? Or is there any sort of contractual binding term, which gets you to offload these volumes? So that's the first follow-up. I'll come back with a question on Nova.
Yes. So, there's a few things there. So, there's a lot -- there is different mechanisms within the Windfield joint venture. Some of that I can't talk to in detail. But essentially at a broader level, there's multiple mechanisms along the path when shareholders look to take volumes. And that's based on long-term plans, medium-term plans and short-term plans. Ultimately, there's a final catch where on a quarterly basis, there can be adjustments to volumes on elections. And that's where -- under that scenario, TLEA has elected not to take full volumes for the December quarter -- for the December quarter.
So, I just wanted to understand just an example here, you're obviously talking about 25% weaker volume. So, is that the flex in the contract roughly that that's the minimum that they need to take? Or is that number being arrived at based on the demand that's existing? What happens if the demand is down by 50%, do we see volumes come off by that much or is there a minimum guarantee in the contract? That's what I'm trying to understand.
Yes, there is flex for shareholders to elect on a quarterly basis, the volumes that they would prefer to take over that quarter.
Look, just one on Nova. You've briefly talked about nickel reconciliation issues as well contributing to the weaker performance. Have you done some work around the magnitude of the issue? Obviously, Nova has had that past where reconciliation issues at the start of mine life were seen, but then the asset was drilled out pretty much in close spacing to the end of mine life. And it would have seen since then that this issue has been put to bed. I'm just trying to understand, is there a risk here that this continues until the time this mine finishes?
Yes, it's a good question. So like you said, we do have some reconciliation issues as we started to bed down over at the start and where we address those. This has come out as a little bit of surprise and the team are working through those reconciliation issues where we think the issue is at the mill side. So, it's something to do with how we are seeing milled feed into the mill rather than a resource and the team is currently working through that reconciliation. And what I do know is for this last quarter -- or this last month, we've not seen the same sort of reconciliations flowing. So, don't think it's an ongoing issue.
So just to confirm. This month, you had that issue basically being addressed and you're getting proper assays around the mill now?
Yes, we're not seeing this issue carry forward at this point in time.
Your next question comes from Kate McCutcheon from Citi.
On Talison, just how do you intend to manage the lower sales next quarter and potentially weaker 2H production, which you flagged? It seems like for this quarter, production at the mine and the mill will continue with plans and it's just the concentrate stockpiles that you're building? Is that correct? And then if 2H production is curtailed, which you flagged, how would that perhaps work at the mining level?
Yes. So, how we've talked to that is what we'll do is we'll end up building volumes at Greenbushes and that's the result of there will be a disconnect between production and sales for the December quarter of about 25%. So, if there's an option, this reflects to the old inventory on site to manage some of that short-term volatility that we see -- that we're seeing currently in the market giving shareholders preferences. Ultimately, there's a strong intent by all shareholders to work through other mechanisms to ensure that those volumes continue to flow without any impact to Greenbushes' operation.
So at the moment, the plan is to run the mine as planned?
Correct. So, we'll continue production through this quarter, continue building the trend and work through other mechanisms to ensure that we can continue to deal with volumes. As you know, Greenbushes is a world-class asset producing at $262 or $263 a tonne. Product is highly sought after.
Your next question comes from Levi Spry from UBS.
Yes, so just to sort of clarify this at Greenbushes. So, is this about the repricing event? Or is this partly about weaker demand?
Look, it's about getting the right mechanisms in place to show all of those volumes continue to flow under commercial terms. And there's multiple mechanisms in there to do that.
Physically, how much can you continue the stockpile?
Good question. The Talison team is still working through that. What we do know is we're looking potentially trying to look for additional storage, but we have no -- there's no impact to this December quarter. We have enough capacity to take that 25% volume.
And if my memory was probably wrong, but I thought TLC didn't take volumes, it was within your -- you had an option to sell it to a third party. Is that still the case or not? [indiscernible].
Yes, that's still the case and that's good.
Your next question comes from Mitch Ryan from Jefferies.
Sorry to belabor the point here, but you've signaled times as a range of mechanisms. Can you potentially outline what that whole range of mechanisms are? What are -- what's on the table here? How -- what could be the spectrum that we start thinking about?
Yes. That's relatively difficult for me to get into that detail, into that detail of all of those mechanisms as part of that process within the Windfield joint venture. Ultimately, the variance comes back down to what happens on a quarterly basis where the shareholders are provided with the option of finalizing volumes on a quarter?
Your next question comes from Tim Hoff from Canaccord.
Thanks very much, guys. I might switch just quickly to the Kwinana Refinery. It's been underperforming, I think, versus expectations of the acquisition and over the last few years. At what point is a determination to be made on whether you need to write-down what's being spent on this asset?
I'll talk broadly about operating performance and I'll hand across to Kath to talk about how you consider any asset valuations. You are right. Kwinana has underperformed. What's important to note is that we still got a program, a work to lift that performance and what we're doing with these small capital items as we work through some of the ratifications. The biggest constraint has been is time. It's pushed out of time. We're not pushing out any sort of major capital expenditure programs. We're currently in shuts at the moment. We'll come out of that shut early in November. We'll continue to ramp up and the team remains confident we'll reach 50% of nameplate by the end of this calendar year as we work through, continue to build up nameplate through the next calendar year.Kath, do you want to make a comment on...
Yes. So obviously, testing happens or testing for triggers happens and then testing of impairments and right out happens at each half. It was done at June, obviously, because that went into our full year results and the team will retest at December. At this point in time, they have not advised us that there's any indications at this point.
And if I may just stay on refining quickly and indulge in another question. What is IGO's competitive advantage when it comes to establishing a nickel refinery in Western Australia?
Our competitive advantage there is that one we will have feed. Two, we will have the right partners around us. Three, we will have -- we have the process in terms of the technology on the process. Ultimately, to reach a financial investment decision on that, we'll all have to feel comfortable that the returns are there and that we've significantly derisked it from both a capital ramp-up and commissioning.
Will be interesting to see how it goes with the capital pressures we're seeing. I'll pass it on.
Your next question comes from Kaan Peker from RBC.
Just on Kwinana following on with Tim's question, what's the likelihood that there will be a pause on Train 1 if the December fixes don't work? And are there implications for Train 2; i.e., will it be paused as well?
Yes. Okay. So, implications on Train 1 if we don't get to 50%, ultimately, would have to reassess what we do as part of our continued rectification program. And so, I actually see -- I still see is likely that will get to that 50%. So, we really haven't -- haven't really addressed that it doesn't. There's a couple of things that would going into the October shut that we have to get right, some major piece -- there's mainly associated with the sodium sulfate, which is the waste stream. At the moment, we've got the waste stream is a bottleneck. Therefore, we can't push the lithium hydroxide, which is including installation of a secondary centrifuge. So at this point, we really remain confident on that 50%.In terms of Train 2, we continue to work through the front-end engineering and design. What we state very clearly is we won't make a capital decision until we are completed all the front-end engineering design and feel that we've got the right engineering solutions in place for Train 2 both reach nameplate and ultimately, ensure that the commissioning time is significantly less than what we've seen on Train 1.
And my second one is on the nickel assets, including I suppose downstream. But given where nickel sulfate prices or premiums are in the nickel price, what's the likelihood of proceeding with the downstream processing? And just wondering what -- if all options are on the table for Cosmos and Forrestania such as care and maintenance?
Yes. So on nickel sulfate premiums per se, yes, we understand that nickel sulfate premiums are trading at a discount in some markets, in other markets, they're still attracting a premium. We have made the conscientious decision that we're not going down the sulfate route. We're doing -- and that's part of that partnership in terms of elimination of the step driving cost advantage of driving improvements in recoveries by going straight to a [ pre-can ]. We see nickel sulfate is just another nickel intermediate in this battery supply chain route and producing some intermediates in these battery supply chain routes is potentially higher risk.In terms of Cosmos, we remain committed to Cosmos in terms of the value, it's unlikely that we'll see any care and maintenance, but we'll come out with our reset plan in December. Forrestania. Forrestania still makes a good margin. We've got to ensure that we really drive costs as we continue to work through the rest of the life of mine plan.
Your next question comes from Matthew Frydman from MST Financial.
Matt and Kath, and apologies because I'm going to take it back to Greenbushes. But clearly, one of the motivating factors behind not electing to take the full allocation was the price. So firstly, can you talk us through, I guess, what would need to happen from here if the JV did decide to change the pricing mechanism? It's obviously happened before, but remind us of how often these shareholder meetings occur where these sorts of issues are discussed and I guess what the potential timing from there could potentially be?And then secondly, I guess, purely from an IGO perspective, because I understand you can't necessarily talk to what the JV as a whole might want. But would IGO like to see the mechanism change to something maybe that's closer to spot or even forward-looking pricing rather than backward looking? Would you prefer to keep the status quo? Or are you largely indifferent given that Greenbushes is, as you say, the lowest cost producer in the market?
In terms of first question, I can't really get into that detail. All I can say is that shareholders negotiation -- negotiating the outcomes to deal with the short-term variance and volume uptake. There's a strong intent by all shareholders to ensure that production is -- continues of this world-class asset as is an important part of their feedstock into their integrated businesses and there's other more [indiscernible] in that. And now talking to an IGO perspective and this is IGO perspective, this is my perspective, which is easier to talk to. Ultimately, as this market builds out, we're looking through what is it the best way to ensure price transparency. And the industry as a whole has to work through that.We're immature. This industry is immature. We're seeing a lot of volatility. As the industry builds out alternate supply chains, especially outside of China, we'll see less and less volatility. But ultimately, as an industry, we'll need pricing mechanisms to ensure that has the greatest price transparency on a spot basis. And we're happy to explore some of that in due course with consideration of multiple things associated with the joint venture.
Do you think a structure exists currently to support that? Or is that longer dated would that require mark in your view? Or you think that the current price reporting agencies are sufficient, but maybe just the mechanism needs to change?
Maybe the pricing agencies, there's this is the variance between the agencies, there's variances associated with the lag on that. There's a variance in terms of understanding the volumes that are going through those pricing agencies. So, it's not perfect by any means.
Your next question comes from Daniel Morgan from Barrenjoey.
Sorry to bring it back to the Greenbushes pricing mechanism. But if we take a step back, lithium demand is going to be up, call it, 30% year-on-year this year, and Greenbushes will be responsible for adding probably 10% volume to the market. So, the market is growing faster than what you're adding into it. And the newer volume is higher cost than the Greenbushes. Doesn't it make no sense for Greenbushes to take the foot off the gas on volume expansions, particularly when operations are humming so well as outlined in the quarter in terms of volume?
I think now in terms of the shareholders' point of views, collectively.
And then my second question is on Kwinana. What is happening there like behind the scenes that you are across and your team is across that gives you confidence that this thing is going to come together and actually work? Like what are some of the tangible improvements happening through the quarter that gives you the confidence that this thing is worth sticking with? Can you bring out some of the qualitative issues?
Yes. So, like I was down at Kwinana last week as part of the review of the shut. We've got some team capacity down there in terms of reviewing. We're also bringing in -- ensuring that we have the right expertise by a number of groups of consultants helping us work through that. Like I said, it's about a program of work as we continue to do some of the ratification on the shut. We remain confident that we'll get to that 50% in December. And then longer term, we'll continue to look our ramping that up. Has it been challenged? I think these are complex refinery settings. So, they do have a level of complexity and associated with Train 1, that's being compounded because of poor engineering from day 1.
Is it worth just shutting the whole thing down and doing complete rectifications for a period of time where it just seems like you have these maintenance shuts that come in and you try to tie in these improvements and then we haven't seen huge improvements in volume? Like is it worth taking it down for a period of time and really working on all the rectifications or what am I missing?
Yes. And that has been some of the discussions that we have been having. However, we're working through that program of work as we work through and we'll continue to do this October shut. We'll get to that 50%. And then we'll look through what we need to do to get to the next step up of production at Kwinana.
Your next question comes from Jon Bishop from Jarden.
Just again on the pricing side of things for Greenbushes. I guess the one question that doesn't seem to reconcile with your commentary around potentially having to dial back production is clearly the EBITDA margin. And if you've got third-party rights to look at selling the allocated offtake, why wouldn't you guys be looking at BMX auction style and achieving the headline benchmark prices, which are still $1,900 a tonne at the moment and give you a pretty healthy margin at sort of 80%, 85%?
Yes. I think Jon, because at least one of these mechanisms are a part of the conversations with shareholders at the moment. At the moment, we don't have to trigger that because we've got stockpiling capacity at Greenbushes. But there is multiple mechanisms in place or can be put in place to ensure that we continue to drive production at Greenbushes.
But surely, dollars today are better than stockpiling for what appears to be potentially a softer outlook in the short term?
Potentially, just from an IGO perspective, but you have to take in consideration of all the other shareholders' perspectives as well.
And just on that, are you able to sort of give some color as to Albermarle's view here? Because, I mean, corporately, they've obviously taken a potentially longer-term view on outlook for spodumene prices and lithium markets in general in some of their corporate behaviors. What's their sort of attitude in these joint venture discussions around stockpiling?
Jon, you know my answer to this one. So, [Technical Difficulty] which I can't talk to what Albermarle's views are. I'm happy to talk about what my views are or IGO's. Fair enough. Okay. Beg your pardon? Good try.
And then just to round out, quite clearly, the inference to take from all of this is there's not going to be an obvious interruption to time lines on CGP4 and FID therein?
No, interruptions of any growth plans.
Your next question comes from Matt Chalmers from BofA Securities.
Look, just one brief one from my side. I know it's been covered in a lot of detail. It's just around -- we mentioned that the production or the volume requirements coming from TLC is lower going into the coming quarters. I just wanted to know potentially from a different angle, if the same could be said from the volumes being requested by Albermarle or was that -- are you just really focusing on TLEA and TLC's requirements?
Yes. I have to -- so what I can say on that one is in the December, the volume variance that we're talking about in the December quarter is associated with TLEA.
Your next question comes from Robert Stein from CLSA.
Just a quick one on, I guess, the risk to IGO shareholders going forward in the context of your quite big partners' ability to withhold supply and manage the price in that respect. You say there's no interruptions to growth plans. But if the growth plans do sort of go ahead in terms of the capital portion of those, what's the risk going ahead on sort of volume nominations from the increased lines if demand is weaker? And maybe to put it another way, what sort of rights do you have to be able to ensure that the volumes are effectively taken up?
Yes. just to answer that question, I'll just take a step backwards a little bit in terms of what we are from all shareholders' perspective is that this is a real near-term going forward volatility. There's no -- even from a medium and longer term as all shareholders are anticipating that there's still going to be strong demand, fundamentally strong demand and this challenging bringing production and there's such a disconnect between the demand and supply that everything we do at Greenbushes should be continued.And you also have to remember, it is also in context that Greenbushes is the world's best hard rock spodumene mine producing a $260 a tonne and making significant free cash margins for all shareholders from that operation. So, there's under any scenario, even if you're looking under different shareholders' perspective, capital investment in terms of growth at Greenbushes still remains a major priority for all of them.
But if you're buying it, obviously, at a price much higher than spot, then that cost economics doesn't particularly hold up in terms of the purchaser and the downstream partner, but then also, if you've got larger volumes elsewhere, brine operations and the like, there's a supply management angle that needs to be pay up. So, I'm sort of interested in how much sway you have in a downside scenario to be able to influence an outcome?
Yes. And again, we're looking at very short term. So, we're looking at -- I mean our pricing mechanisms are 3 months, order for prior quarters or the current quarter. So, we are dealing with the short term given a short term -- if the pricing benchmarks arrive and I do catch up to current, then we're just looking at a quarter, a quarter where we're looking at lag. So, we're not dealing with fundamental long-term challenges, we're just doing with a short-term challenge in terms of this shortfall nominations associated with the December quarter and short-term variance associated with some volatility in the market.
Your next question is a webcast question from [ Peter Lang ]. Are there any penalties for your JV partners from electing to take less than their allocated production from Greenbushes?
Yes. I don't -- I won't get into that whole process. Fair to say that I just have that quarterly right to adjust that volumes.
Your next question is a follow-up from Hugo Nicolaci from Goldman Sachs.
Two questions from me, but -- and again, sorry to belabor the point on the pricing. Look, I appreciate you can't talk on behalf of the other shareholders in the lithium JV. So, maybe from an IGO perspective, what level of inventory are you seeing for lithium chemicals in China at the moment that might limit spot spodumene demand? And what demand would you expect for spot spodumene volumes if the JV agreed to sell the excess volumes into the current market?
Yes. Okay. So, I'll talk to an IGO perspective. What -- from our perspective, again, we're looking at the short-term volatility and the short-term volatility is largely driven China-centric, largely driven by sentiment-driven buying in destocking that happens in China. It can cyclical, it can actually just be sentiment-driven fundamentally, demand is strong out of China, while we're dealing with this short-term volatility. From an IGO, yes, sorry. Yes. Sorry, what was the second part of that question, Hugo?
Just if you were to sell spot spodumene volumes today, what level of demand you expect into the fourth quarter, I guess, just noting that one of your peers last week highlighted they expected that demand to be strong into the end of the year?
Yes. The demand, I still expect demand to be strong. It's just about what mechanism you would use.
I think I'll pass that one up for now. Maybe just another clarification on Kwinana. Good to see that some of that product is now qualified and being sold. But can you maybe just give us a bit more color into the issues outside of the waste being a bottleneck? Is it issues with conveyors, dryers, pumps, pipes? Any color there you can provide in terms of the Train 1 issues would be great. And then secondly, any additional information around why the Train 2 FEED contractor and completion has slipped another quarter?
Yes. So, in terms of current constraints to the current -- some of the current constraints to get to that 50% are being rectified as we speak in the October shut. That includes some realignment of the belts in the dryer. That includes putting an heat exchange on some of the circuit at the back end, that includes the additional centrifuge on gyplime sodium sulfate, includes additional some pump changes, also looking at filter presses of the waste. So, there are just additional smaller things that we do to get to that 50%. That list continue -- once we get to the 50%, we'll find out where the next constraints are and we have an understanding of those constraints already and we'll continue to do some rectification.But it's not like a major piece of equipment. So, it's not like we have to change X. It's not -- given the major pieces of equipment are performing well and we don't think that they will be the constraints. It needs additional material handling circuits and some of these smaller pieces of engineering equipment that is a part of this rectification process.
And then just on the Train 2 FEED contractor being pushed back a quarter and the resulting FEED completion slipping into mid next year?
Yes. It was just taking us a little bit longer to ensure that we had the right contractor or consultancy engineering house on board and they have the right teams in place. So, sourcing the right team, making sure that team is available to do that work is what some of that lag time is. What we've made very clear is that we will do the study. We'll have the right teams in place. We'll have the right consultancy engineering houses in place and we'll also have the right contract structures in place even if it does take us a little bit longer.
Your next question is a follow-up from Levi Spry from UBS.
Maybe sneaky one on Cosmos. So, the spend was still pretty elevated there. What's the update on the rate of spend, I guess, to guide us there? I know you've said the big update comes later this month, but what can we expect in terms of outflows this quarter or...
I'll hand to Kath for that one.
Yes. We would do to actually be spending quite a bit more this quarter. So that's actually down from what was the original plan as we've been reviewing things. And therefore, I think that you could easily estimate that the spend is similar or marginally less the next quarter as we continue to review things and reset the project to achieve our optimal outcome.
And just one more on Greenbushes. So, what's the timing of the next steps? So, agreeing on the mechanism and the volumes like do we -- sort of the end of the quarter? Like how do we think about whether you can sell some of your own third-party material next quarter to prevent even greater stockpiles building?
We would expect to be reporting in the quarterly. Next quarter.
Okay, not till then Okay.
Your next question comes from Mitch Ryan from Jefferies.
Do you have a question, Mitch? Easiest question of the day.
Your next question comes from Kaan Peker from RBC.
Maybe just following up on Levi's question. Can we just get a bit more understanding around that process? So, I assume that when the allocation is finalized for the quarter and if there's a shortfall, then the shareholders can bid for that allocation for the allocated volume? And then you can sell on that additional volume at spot. Is that how it works?
Look, there's -- it's part of a conversation and a discussion happening with shareholders to deal with that shortfall. And where that shortfall goes, whether it could goes back to the shareholder or goes to market or how we deal with those short-term volumes, we're dealing with short -- near-term challenge. So, the idea is that the shareholders are working through all that alignment.
Okay. But there's nothing further you can sort of discuss on the process of the...
No. So, I mean, it's a causation, it's a discussion. What I can say is the shareholders are working through to deal with -- to ensure that Greenbushes continues to operate and generate free significant free cash flow margin for all shareholders and also important product for their integrated businesses.
And just last one on the TLEA dividend for this quarter. Was some of that due to the Essential transaction? I think a couple of quarters ago, the dividend was less because there was some capital being allocated for that transaction. Obviously, that didn't go ahead. Is that dividend part of it?
Yes. There is a small portion of that, that is that. There was money held back for Essential and that flowed through this quarter.
Thank you. Unfortunately, we have run out of time for today's webcast. I'll now hand the conference back to Mr. Dusci for closing remarks.
Thanks, Darcy, and thank you, everyone, for joining the call. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.