Pilbara Minerals Ltd

ASX:PLS

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by, and welcome to the Pilbara Minerals September 2021 Quarterly Investor Conference Call and Webcast.[Operator Instructions]I would now like to hand the conference over to Mr. Ken Brinsden, Managing Director and CEO. Please go ahead.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, Bernadette. And welcome, everybody, both on the [ Chorus ] line and shareholders participating via the webcast today. Thank you very much for your participation.We are looking forward to sharing a bit more detail about what we feel has been another very, very strong quarter for Pilbara Minerals against the backdrop of rapidly improving pricing dynamics both at a lithium chemicals level and, of course, also at a spodumene level. We've been able to create lots of production, in fact, with our Pilgan Plant. The original Pilbara Minerals facility operating above nameplate capacity, combined with the strong pricing outcome, means that we're now well into a healthy operating [indiscernible] environment [indiscernible] looking forward to further growth in respect of the pricing outcomes themselves. So yes, a very, very strong quarter but likely only just the beginning as it relates to this cycle. Demand conditions, also very strong.I'll come back and speak to the effect of the market in more detail after information shared from Dale Henderson, our Chief Operating Officer; and Brian Lynn, our Chief Financial Officer. Also with us in the boardroom here are Alex Eastwood, General Counsel and Chief Commercial Officer; and David Hann, investor relations specialist. So yes, looking forward to sharing more detail about what it is that we've been up to more recently or post the end of the quarter.You'd also be familiar with the commissioning of our Pilgan Plant improvement works and the restart at the Ngungaju plant, both of which -- both projects now being well underway and key contributors to the next round of growth in Pilbara Minerals' Pilgangoora production base. And then this week, the finalization of the POSCO downstream joint venture and offtake terms. We're very happy to get to the completion of that deal or the execution of the terms given that it had been a very long-standing relationship, a relationship that we've enjoyed, albeit taking quite a long time to get to a close. That job is now done. And we are looking forward to the effect of further vertical integration of Pilgangoora's spodumene supply to the proposed plant in South Korea. In terms of the completion of that deal, some Korean approvals, which we'd consider to be administrative in nature, means that we'd expect the deal to come to a close by the end of the December quarter. In the meantime, POSCO is continuing to get on with their work that facilitates the construction of the project, some early works that are already underway, with major construction works to commence in the March quarter. And what that means is that the POSCO-Pilbara Minerals hydroxide project is one of the near-term growth elements in hydroxide chemicals production, with commissioning commencing approximately mid-2023. So yes, relatively short dated as it relates to future lithium chemicals expansion; and Pilbara Minerals is very, very happy to be a part of it.I'm going to come back a little bit later in the call. I'll talk a bit more about the state of the market and Pilbara Minerals' participation. In the meantime, I'll hand on to Dale, who'll give you an overview in the operations and projects area.

[Dale Robert Henderson, Chief Operating Officer]

Thanks, Ken. And good afternoon, everyone.My comments will be in 3 parts. So I'll speak to the operations, firstly; then projects; and then to finish, just a quick touch on exploration and the reserve.So starting with operations, really positive quarter for the operation, save for one recordable injury where we had a cut to a hand. That being said, TRIFR did reduce for the quarter as a few of our late-dated injuries dropped off [ the formula ]. So we're down at a TRIFR of 1.88. So good to see that trend but, yes, of course, a shame on the injury for the quarter.From a production perspective, a big quarter, 85,000 tonnes of spodumene concentrate produced, 11% increased from the previous quarter. From a mining perspective, it was about -- the quarter was all about increased movement for mining, up 35% by volume from the previous quarter. Most of that was owed to an increase in waste movement, which has been part of the plan to increase strip. As we've moved out of the down cycle and into this up cycle, we're doing some catch-up on waste movement. So it was roughly a 50% increase in waste movement, so that went well. We would have liked to move a bit more for the period, but nonetheless we're happy with mining activity with ore feed being -- continues to plan. Mining generally across the industry has been a challenge for personnel. And our mining services contract has certainly been feeling that, so we're working closely with our service contractor, but as I say, it hasn't affected us in terms of production outcomes.Moving from mining to processing. Recovery was on plan and run time for the plant was on plan, so all of that has come through, as I say, to a very positive quarter for production.So moving from operations, into projects. The projects world for the business has also been very, very busy with a suite of projects happening across the Pilgangoora asset. So starting with the Pilgan Plant, and Ken touched on this: We -- the quarter was about bringing on the improvement projects package, as we've called it. That's a series of projects to improve the Pilgan Plant but the main one being the installation of some debottlenecking and throughput increase projects which give another 10% to 15% production capacity. So that was progressed during the quarter. And we've got first concentrate from those improvement projects, which was announced just the other week, on the 13th of October. So during the course of the December quarter, we'll continue to ramp that up and enjoy those extra tonnes. So that's all on target, so happy about that. So that's the Pilgan Plant. Moving to Ngungaju: busy, busy place at the Ngungaju plant, as we've been undertaking commissioning and restart works. And that culminated in a first concentrate announcement on the 13th of October as well. So for the core circuit. So we're -- as with the improvement projects, the Ngungaju plant, we're busy ramping that one up and looking to have that at full run rate by June next year.Other projects underway. Solar farm. We announced the award of the 6-megawatt solar farm to Contract Power Australia. So that was awarded just the other week. So that's triggered a key milestone and a key commitment under our clean -- a clean energy finance undertaking. So that's underway and that's -- and a good step forward in terms of our decarbonization pathway. Lastly in the projects category, studies are progressing for detail and engineering for our next incremental expansion for the Pilgan Plant. So that's been progressed, and readiness for ultimately an FID decision for that incremental expansion. And that completes projects.So to finish, just a quick touch on exploration results and reserves. So during September, we announced the mineral -- a new mineral resource; big increase there up to 309 million tonnes, a 39% increase. Ore reserves also announced, and again another big increase there, 54% increase to 162 million tonnes. So that was announced on the 6th of October. So we were absolutely delighted to have completed that re-rate of the reserve and resource. It was a key benefit of the Altura acquisition and one -- we were expecting we would realize some good benefit of amalgamating the 2 assets and that certainly proved to be the case, so we're delighted with those big step-ups in reserve and resource.So in summary, very, very busy quarter across operations, projects and the exploration space but very positive.So with that, that's a wrap for me. And I will hand over to Brian, our CFO.

[Brian Lynn, Chief Financial Officer]

Great. Thanks. Thanks, Dale. And good afternoon, everyone.I think the overriding reflection for me on this quarter result is to think about where we were 12 to 15 months ago, when we were receiving a price for our product below USD 400 a tonne. And for this quarter, just on the September quarter, we've -- actually are now operating at a -- or had achieved an operating margin for each tonne sold of -- in excess of USD 400 a tonne, so it is quite amazing how the market conditions have turned around and how quickly things are moving and, as I think everyone is aware, that prices continue to improve.So for the quarter. Dale mentioned that we produced about 86,000 tonnes of product. We drew down about 6,000 tonnes of product from inventory and that resulted in us shipping 91,500 tonnes of product. The average price achieved for the product shipped during the quarter was between USD 850 and USD 900 a tonne. Now that has -- that range is given because there is still some provisional pricing adjustments which are still to be determined but between USD 850 and USD 900 a tonne price received.The unit operating costs achieved for the quarter was USD 445 per dry metric ton. So obviously price [ at least in that cost ] gives us a margin in excess of USD 400 a tonne, which is a very pleasing outcome and obviously reflective of where the market currently is. This then transpires into an improvement in our cash position. So when we quote our cash position, we also quote the letters of credit that we have in place for shipments that have already left and which we can convert to cash if we chose to. So at the end of September, we had AUD 137 million of cash and LOCs compared to June of $116 million, so we've had an improvement in our overall cash position of -- in excess of $20 million during the quarter. That improvement is largely driven by the improvement in the cash operating margin I referred to before.So there was about a $48.5 million cash operating margin from a cash point of view during the quarter. And that's really reflective of the strong market pricing conditions; as well as the fact that, I think, we've largely contained the costs that we are able to control. We also have laid about $15 million of cash as investments into our business. And that was largely in relation to the improvements being made to the Pilgan Plant, the restart of the Ngungaju plant as well as getting it ready for operations and also on capitalized waste development to access the ore required to run -- to increase the run rate that we wish to achieve in the short term.From a unit operating cost point of view, I mentioned that we achieved a cost of USD 445 a tonne or, in Australian dollar terms, just over $600 a tonne. And that compares to our guidance which we put out in August which was between USD 395 and USD 430 a tonne. So that is obviously higher, slightly higher, than the guidance, but that is largely -- those high costs are largely driven by the underlying market conditions that we are experiencing.So the effect of a higher selling price flows through into a higher royalty that we pay to the state government. And so that will -- that sort of represents about USD 12 of that cost increase. And then we're also experiencing much higher freight -- ocean freight costs at the moment. So that accounts for about an additional USD 18 a tonne compared to what our -- we had assumed in our guidance. And that's largely around there's been a tightening in supply of suitable vessels as well as just generally much stronger demand conditions for ocean freight.Lastly, I think I'd just like to quickly touch on some updated guidance that we have provided in our quarterlies. So in our guidance that we provided in August, we did mention that we would be providing an update on how much waste mining we would be capitalizing following the completion of our ore reserves, which we did during the quarter, as Dale mentioned. So having done, having completed the ore reserves, we've now been able to establish what we believe will be the deferred waste mining costs that will be capitalized to our balance sheet. And we forecast that to be in the range of between, and this is in Australian dollar terms, $40 million to $50 million for FY '22. And the reason that range is relatively wide is it's just reflective of the significant ramp-up in activity that is going to be occurring at the operations during FY '22.We have chosen not to change our unit operating costs forecast on the back of the change in the deferred waste mining costs. You would obviously expect that, having capitalized some of those mining costs, the unit operating costs would come down, but that reduction is actually -- we believe, is going to be offset by higher royalty costs and higher freight costs. So the savings that you get from capitalizing the mining costs is largely offset by the higher royalty costs on the higher pricing and obviously the higher freight costs which we expect will continue for the rest of the FY '22 period.I think that's all I wanted to cover off on, so I may hand over to Ken now for further commentary on the market.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Thanks, Brian. And thank you, Dale, yes.So to talk a bit more about the market, which is obviously an area receiving some very, very close attention, we'll share what we can as it relates to the combination of our market intel; interaction with customers; and for that matter, renegotiation that's going on with customers.So really an incredible quarter for the acceleration in chemicals pricing. And by that, I'm principally referring to domestic pricing in China, which is the most relevant marker as it relates to spodumene sales. Within that period of time, according to Platts, ex works pricing for battery-grade carbonate went from CNY 87,000 in the beginning of the quarter to end the quarter at CNY 185,000, so a very, very strong uptick in chemicals pricing within the domestic market in China; and some of that has reflected in -- being reflected in international pricing as well. One of the key drivers is as a function of price discovery with respect to lithia units. And principally, by that, I'm referring to our BMX platform auctions, which have obviously put a rocket under the costs of lithia units. And then those costs are passed downstream to lithium chemicals players, hence the very rapid escalation in chemicals pricing.Now we have been quite deliberate in our strategy. With available offtake not currently accounted for -- well, sorry. Not accounted for in offtake, having tonnes available with an emerging spot market, we saw the opportunity to create a sales environment that could be targeting the marginal buyer. And that's now being reflected in the value in the spodumene. So the 3 options that we've had, so far, demonstrated what we would consider to be true price discovery for the value in the lithia units, approximately USD 1,250 a tonne for 5.5% product FOB Port Hedland, well, leading up to the most recent auction, $2,350, 5.5% basis FOB Port Hedland.Now we've been quite deliberate in that strategy because we want to understand the true value in the spodumene so that we can have that reflected better in offtake arrangements with our longer-standing customers. And I'm pleased to say that those conversations have both been well progressed and largely achieved outcomes that we would consider to be appropriate. Whilst not yet complete with every customer, we've certainly completed them with respect to the majority. And that now translates to offtake pricing, based on a spot basis for this week, of between about $1,650 and $1,800 per dry metric ton CIF China SC6 basis. That reflects a re-rate in the value of the offtake but also accommodating the appreciation in the chemicals price, so there's 2 things happening here. Chemicals pricing is increasing, so naturally that would increase the value in the spodumene. However, more importantly, we are now achieving a bigger slice of the pie in the chemical value via the value for sales in our spodumene under offtake. So that does represent a pretty material change for Pilbara Minerals as compared to the historical norms.So to be clear: offtake currently pricing in the range of $1,650 to $1,800 per tonne.The other point I'd make in respect of spodumene price. Pilbara Minerals achieved a very, very healthy price for its spodumene in the September quarter, we believe, ultra competitive and likely beyond the pricing achieved by our peers. And yes, we're very happy with that outcome. And as Brian has quite rightly pointed out, that translates to some very healthy operating cash flow, with an expectation that that's going to be materially higher during the December quarter as a function of what we've achieving -- we're achieving in respect of offtake pricing and, for that matter, what we might yet achieve in further spot sales should we undertake any during the December quarter.So in summary, quite an unusual period of time in the market, but I feel like Pilbara Minerals has achieved as good an outcome as you could hope for and, I would argue, well beyond people's expectations as to what's going on with respect to offtake pricing. So I would like to think that that's going to result in -- it's going to be reflected well in terms of Pilbara Minerals' performance for pricing in these next periods.Right. So I think that represents the market summary. Inevitably there will be further questions, I would imagine. Bernadette, why don't I hand to you to open up the call for questions?Thank you.

[Operator]

[Operator Instructions] Your first question comes from Al Harvey of JPMorgan.

[Alistair Harvey, Research Analyst]

I think, just first up, Dale, I think you mentioned that you are doing an updated plan on the Pilgangoora [ for expansions ]. I'm just wondering what kind of work has been done here. Is it kind of just refreshing the previous Stage 2 and Stage 3 studies? And what's the kind of expected timing for when we could get those releases? And how long across till we get an FID there? And is 1 million tonnes per annum still the target?

[Dale Robert Henderson, Chief Operating Officer]

Yes, sure, no problem. So firstly, 1 million tonnes and above is still what we have in mind in terms of the total aggregate production achievable from the 2 operations. The studies that I mentioned are essentially a refresh for the phased expansion for the Pilgan Plant. And we are intently focused around that first phase, which adds another approximately 100,000 tonnes of spodumene concentrate production. We see that really as being the next cab off the rank given that we've done improvement projects. We've got the Ngungaju plant starting. That next piece would be that first phase of expansion for Pilgan. For timing: So we're doing some more detailed engineering around that first step right now, and we're anticipating to mature that to a conclusion probably very early next year. And about that time, the Board and management will obviously be circling the appropriateness or not to move forward with an investment decision.So that's where the focus is right now. And parallel with that, there are -- there's another [ stream ] around the next step, being the Phase 2 of the Pilgan expansion. And that's really the final leap taking us up to that 1 million tonne per annum plus, but that would follow later. We're firm around pursuing an incremental expansion. We think that that's a prudent strategy to deploy given [ history in the market ]. Does that answer your questions, Al?

[Alistair Harvey, Research Analyst]

Yes. That's perfect. If I can just [indiscernible] another one in, I was wondering if you guys could just clarify a few things with the call option to increase your stake at the POSCO JV to 30%. I just wanted to make sure. [ You can boost up ] -- that up to that extra 12%, as long as you exercise the call option [ before battery-grade spec is reached ]. And if that's the case, you only pay 12% of the $650 million to $750 million-plus of CapEx for the project. Is that correct? And is there anything that would lead you to wait a little bit longer and subsequently pay fair value [indiscernible]?

[Kenneth Edward Brinsden, MD, CEO & Director]

I think your understanding is correct, Al. The mechanism you described frames the decision for Pilbara Minerals, and I think logic will dictate that that's the path you would typically follow. The only other circumstance that we were trying to protect was that, if the project became difficult or we're exposed to significant cost overruns, then we wouldn't necessarily have to exercise straightaway. So that was really an insurance call. So I think the primary methodology and what you'd logically expect to happen is what you described, that we buy in at cost in the period leading up to and including the effect of the plant itself being certified.

[Operator]

[Operator Instructions] Your next question comes from Hayden Bairstow of Macquarie.

[Hayden Bairstow, Analyst]

Just a couple of questions from me. Firstly, just on the discussions around the pricing outlook. I mean obviously one of your offtake partners has effectively agreed a similar sort of high number with Orocobre for Mt Cattlin. I'm just keen to understand what those discussions are about. Are you looking at changing to direct links off the domestic prices for carbonate and hydroxide in China or individuals or more reflecting of what you're getting on the BMX platform? Is that sort of the discussions that are ongoing? And I presume, given that Mt Cattlin has sort of been sorted, that there's different discussions with different offtake partners. Is that sort of how to think about it?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. They all differ at least a little bit but not that much as it relates to each customer's position in offtake. The negotiation, really what it reflects is a change in the relative value in spodumene contributing to the value in the chemical. That's the way to think about it. So the effect of that uplift, at least in the current cycle, is a double whammy because chemicals pricing is going up. And therefore, spodumene would have been going up, anyway, but now there's the combination of achieving a larger slice of the pie. To your question about the price reference: It is mostly about China domestic production and the effect of the ex works price as compared to international pricing. So that really is a dominant price reference or index as it relates to the relativity to spodumene, so that's typically where the customers gravitate to.The link to BMX, we'll -- because there's not -- in the eyes of the market, there's not sufficient volume being priced against that auction outcome. There's no one that's prepared to peg the value in the spodumene in offtake through that price, so from our point of view, it was always about just getting reasonable discovery for the value in a marginal tonne and then having at least that -- part of that reflected in the value in the offtake. And I'm pleased to say that that's largely what's happened. And the customers have been accommodating because the alternative is worse for them now, the idea that there may not be supply. That's a big issue and that leads to a reasonably pragmatic discussion about realizing the value in the spodumene. So all in all we'd say a reasonably fair outcome and represents a new norm for the value in the spodumene in the market under offtake.

[Hayden Bairstow, Analyst]

Okay, great. And then on that price range you're talking about, that's just for this quarter. Or are you sort of looking at some stuff over -- or volume over the rest of the [ financial ] year?

[Kenneth Edward Brinsden, MD, CEO & Director]

No. We were thinking about that really being a reflection of this quarter, at least based on what we know today. Pricing is still -- under these revised terms is still provisional, with the settlement on final pricing to be determined. And that's why there's a range there to indicate the value in the spodumene. Obviously we don't know what's going to happen with respect to chemicals from here, but nonetheless we think that's a reasonable reflection of what can be achieved under offtake in the current quarter.

[Hayden Bairstow, Analyst]

Okay, great. And just a final one, on the cost guidance. It's not changed yet, but do we just assume that, if you do end up with a [ $700, $800 ] price, that cost guidance will have to be pushed up just on the royalty?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, exactly. No, yes, yes. While there's very, very high pricing outcomes, of course, that's going to be reflected through the royalty streams that we pay. And yes, it's becoming material in light of where the price is getting to.

[Operator]

Your next question comes from Harsh Bardia of Citi.

[Harsh Bardia, Assistant VP & Senior Associate]

Just one quick one from my side, the 5.5% grade, I believe, for auction sale. It makes sense because it gives you more sort of recovery range. What it would look like with the POSCO offtake agreement, that 315,000 tonne. Is there any target grade for those materials as well down the line?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Good question, Harsh. So you're right in your thinking about us targeting 5.5% for the purpose of the BMX auctions. We're working on the premise that it's the lithia units that are being valued, not necessarily the absolute concentrate grade, in which case we can take advantage of lower-cost, higher recoveries at a lower concentrate grade. And we're pleased to see that effect playing out as we would have expected, I guess, as we've run the BMX auctions, so -- and in fact, arguably, over time, we might even go lower. And that might very well be justified as a function of price versus costs and recovery. Time will tell. We haven't made any decisions there at the moment. We've been happy with 5.5%, and on the face of it, that looks like a good solution for the market. We're obviously achieving some very healthy pricing outcomes.With respect to offtake. Offtake is priced against a 6 reference. So we're delivering cargoes, on average, sort of in -- you could say, in a range of, for argument's sake, 5.8 through to 6.1, depending on the sections of ore that we're in and/or the customer that we're dealing with. There's lots of variables that sit there, but basically they're priced on an SC6 basis and will continue to do so. That would be the same for the purpose of future deliveries through POSCO unless we chose to negotiate with customers about modifying the grade there. Broadly speaking, we think that there might yet be opportunity in reconsidering deliveries to customers because the SC6 reference is really -- it's a function of history. That's because that's what Greenbushes did for the last 20 years. It doesn't necessarily mean it's the right answer for the industry, so we are of a view that there is opportunities to consider lots of different things in the market that might very well create a more efficient supply chain. So anyway, as it stands today, offtake referencing SC6, BMX referencing 5.5%, but they could be subject to change depending on the opportunity that we see in the market.

[Harsh Bardia, Assistant VP & Senior Associate]

Yes. That's very comprehensive. And just while we are on this grade: that midstream product. I mean it wouldn't matter like what's the starting point for that product, like a higher-grade product. Like how your plant is run in terms of initial output, 5% or 6%, I mean, does it matter in that case as well?

[Dale Robert Henderson, Chief Operating Officer]

Harsh, good question, and the short answer is no. The grade doesn't matter as much for the midstream product. And what you've touched on is actually what we think may prove to be one of the key benefits of the midstream strategy. And the combination of process steps we're bringing together enables a lower-grade product and feed while still achieving kind of the upgrade to a high-quality lithium salt. So yes. So short answer is it's not as affected by grade. And yes, I'll pause there.

[Harsh Bardia, Assistant VP & Senior Associate]

Yes. No, got it.

[Operator]

Your next question comes from Glyn Lawcock of Barrenjoey.

[Glyn Lawcock, Mining Sector Analyst]

Ken, just 2 questions. Firstly, just on the new price reviews or contracts you've got. I mean, how long are they set for? I mean obviously we've had a dramatic change in the market and you've managed to reset. If the market changes again for whatever reason -- I mean, are these locked in? Or do you have periodic reviews that we can change them again if something happens? And when you answer that as well, I just note, if you say chemicals prices of, call it, 28,000 a tonne ex works, give or take, if you look at the price you quoted for spodumene, that would suggest like a 50% margin for the chemicals producer. Is that how we think about it, this has been set so that there's a margin for the chemical guy?And then the second question is more just on the ops and FIFO, the jab rule that comes in end of the year as well. Does that pose a risk to the workforce as well with [ sort of jab rule ]? And do you have a sense of where your workforce is? Because I mean it's unlikely we'll get to 100% of everyone jabbed. Some people will just not want it, so does that bring a risk into the business in the new year?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. With respect to price review, yes, it works both ways. For the same reason, we were able to open up the price reviews. Customers, in theory, can do the same thing. What we've sought to achieve is a -- to redress a balance that we would argue wasn't necessarily there historically when there was very, very few buyers of chemicals in China. And it's all to do with -- I think you've quite rightly said, with the share of the available margin. Now logic -- the logic in hedging spodumene value to the value in the lithium chemicals was that you -- in effect you build up the relative cost base, the cost of mining on a lithium carbonate equivalent basis, the cost of chemical conversion; then determine a [ raw ] cost base for a chemical tonne inclusive of the material costs; and then compare that to the price outcome; and then subdivide the margin to distribute it back to the respective parties. In the example that we've described, through recent negotiations over the last 3 or 4 months, we've sought to ensure that the value in the spodumene attracts more of the available margin but without it going to the point where it has the effect of, how would you say it, not damaging the market but otherwise creating another imbalance that extracts either too much value at the spodumene level or too little value at the spodumene level. So it's a delicate sort of balancing act but one that we hope becomes a bit more normal in the market as compared to the historical norm, yes. There are so few suppliers that can create a -- [ merchant ] tonnes of spodumene in the market today that we've been able to sort of force the hand of the chemical conversion industry to attract more margin to the miner. We'd like to think that, that represents redressing an imbalance historically...

[Glyn Lawcock, Mining Sector Analyst]

So Ken, maybe before you touch my second question then. When you look at it, you -- I understand [ the index. You guide -- you'd like to see an ] index. You do the option, but it's not liquid, but those big prices, do you feel those big prices for the recent 2 options have helped push the chemical price up perhaps a little bit too high to $28,000? Because that -- if you look at where you think spodumene is at $1,700, call it, a 50% margin is what you're giving away to the converter at $28,000. So is it -- what -- [ I'm just trying ] to understand. What do you think is leading? Do you think you've pushed chemical price up through those options? Or do you think the chemical price that we're seeing in China is actually real?

[Kenneth Edward Brinsden, MD, CEO & Director]

It's a natural position for the chemical conversion industry in China to want to take the cost and pass it on. I guess there's a question mark as to how long industry downstream is prepared to accept that cost being passed on, but that's not the answer. I don't think that's really the answer to the question that you're asking because, at some point in time, I feel that, at least in the current cycle where there is insufficient raw material supply, the margin in the chemical conversion industry will become constrained. Now we would like to think that, as a raw material supplier, there's not many other places they can go, in which case our margin will still be okay, will still be healthy.

[Glyn Lawcock, Mining Sector Analyst]

Yes, okay...

[Kenneth Edward Brinsden, MD, CEO & Director]

Second question, yes, ops versus jabs. Well, the situation here is that it's absolute now. There's a mandate, so no one can entertain fly in, fly out without having vaccinated personnel. That's our obligation as much as it's the individual's obligation, so in effect, if they're not jabbed, they are not going to be on a plane here in WA. Now our current take on where the workforce is at is that we see that impact being very, very minor. i.e., there is not that many people that will choose not to be vaccinated. The bigger issue is the borders being opened for the industries such that more personnel are available in total for the workforce, Dale. And in terms of controls, there's rapid antigen testing, that type of thing. That's when it finally hits you.

[Dale Robert Henderson, Chief Operating Officer]

Yes. No, we've -- as to the business risk aspect, Glyn, we are feeling fairly comfortable at this stage. As Ken said, it's a mandate. Everyone has to move in this direction, and we're deploying all of the controls to support that transition. And we've engaged deeply with the full workforce and operation to sort of support them in the process, and through that, we're obviously helping people get comfortable with the need to get these vaccines, jabs. And although it's anecdotal, we've had sort of good progress in that regard. So all said and done, we're not too concerned as we step into that period of required vaccines to the operation.

[Glyn Lawcock, Mining Sector Analyst]

Okay. And sorry, Ken, to harp on it, maybe just going back to the first question just so I'm clear: I should be watching the chemical price ex works. There's a formulaic approach to driving your spodumene outcome. That gives me the bulk of your volume, and then you'll be doing some spot sales on the BMX platform. Is that how I should think about it?

[Kenneth Edward Brinsden, MD, CEO & Director]

Pretty much, yes. 30% to 40% of our sales by the middle of next year will be under either different arrangements or on spot via the BMX platform. As it stands today, it's not that big a number because we're still ramping up the equivalent capacity for Ngungaju, which is in virtual terms where the extra capacity comes from that's not already in offtake.

[Glyn Lawcock, Mining Sector Analyst]

But the tonnes that are under this revised contract, I should be watching the chemical price and just believing there's a formulaic approach to get back to your spodumene price from that.

[Kenneth Edward Brinsden, MD, CEO & Director]

[ Yes, mate, yes ]. We've been pretty clear about that. The bit that's changed is that the proportion of the value [ reporting to spodumene ] is higher, yes.

[Operator]

Your next question is a follow-up by Al Harvey.

[Alistair Harvey, Research Analyst]

Yes. I just wanted to get your view on how you're seeing the relative dynamic between carbonate and hydroxide and battery chemistry, just whether or not the POSCO downstream facility will have any ability to switch to carbonate if LFP batteries keep gaining more share over NCM batteries.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, Al, good question. And the answer is yes. It's a relatively simple carbonation process that twists the hydroxide back to carbonate. And in fact, you'll find virtually all new plants being built for chemical conversion capacity are direct hydroxide routes for that reason. So it's a cheaper path to hydroxide and a very low-cost twist at the end of the facility to get it into a healthy battery-grade carbonate state. So that cost is measured in a couple of hundred bucks U.S. a tonne, as compared to the conversion the other way from carbonate to hydroxide, which depending on the technology and the grade is it's probably a couple of thousand bucks a tonne. So yes, a very simple twist at the end of a current-generation chemical conversion plant. As to the battery chemistry debate: Honestly, for most foreseeable chemical price outcomes, you can be ambivalent about whether you would source spodumene or whether you've sourced [ for iron ] for the purpose of carbonate supply or hydroxide supply. It's not really relevant until you start to get a very low chemical price that penetrates the respective margins of chemical conversion capacity and mining capacity, as compared to [ for iron's ]. So we don't really feel like we have to take a view about the success of any one of those battery technology groups, LFP or high-nickel battery chemistries.

[Alistair Harvey, Research Analyst]

Just one final one. Any update on the Calix midstream R&D work?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. The engineering is well advanced there, and we're not too far away from reporting the first round of outcomes. Keep your ear to the ground there, Al.

[Operator]

There are no further phone questions at this time. I will now hand back for webcast questions.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, Bernadette. Yes, the line is open for the purpose of the webcast, for those to make an inquiry. So we'll have a couple of questions and we'll get Nick to relay them. Thank you.

[Nicholas Read]

We have 3 or 4 webcast questions. We have touched on a few of these issues, so we'll be able to move through these fairly quickly. Firstly, Trent Barnett from Euroz Hartleys asks, should we be assuming spodumene prices of $1,650 to $1,800 for the March quarter if downstream prices don't move from current levels?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Very straightforward.

[Nicholas Read]

Okay, great. We have a question about the Calix situation, which I think you've covered off on. [indiscernible] asks: Is the BMX platform just for Pilbara, or is there scope to auction product from other companies?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, that's a worthy discussion topic for which, at least at this point in time, it's unresolved. We had always thought that a platform that ultimately penetrates deeper volumes in the market that is more spodumene or more lithium price points that are established via a platform creates greater price transparency. So for example, today, one of the critiques of the BMX platform might be that it's [ only ] the very margins of the market. And it's just one price and it doesn't represent any volume. Well, we would argue perhaps something slightly different as a function of what we see in the bidding itself and the number of bidders and the number of bidders that are prepared to go deep into the auction. So those things, we think, are important tools that are available to Pilbara in understanding the market as an auction progresses. And by the way, we would say, generally say, that's been very healthy. And there has been healthy competition to discover the price, so from our point of view, we'd say that's a great big tick in the box. For others to enter the platform, I think the answer is maybe but unresolved as at this point in time.

[Nicholas Read]

A couple of questions from [ David Noon ]; and one is of -- the impact of current spot prices on your pricing outlook, which I think you've, well, clearly covered. The second question was what formula is proposed [ for sales ] to the POSCO JV at market for that committed offtake.

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, the formulas envisaged in the relationship with POSCO are not that dissimilar to the formulas that otherwise exist with our offtake -- existing offtake customers. So it's a connection between the value in the chemical as compared to the value in the spodumene. The logic there is similar, and it's intended to discover [ our ] market price so that it represents the value in the spodumene tonne for a longer-dated offtake relationship, yes. I don't think there's any reason to be concerned about it not being anything other than a market price. There's no kind of reference to discounts. There's no reference to premiums. It's just the market price, and that's sold at arm's length to the joint venture.

[Nicholas Read]

A question just in from [ Mark Bagden ], who says, "You said you've progressed well with negotiating [ offtakers ]. However, not all have been renegotiated. What percentage are yet to renegotiate [indiscernible]?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Look. The majority are agreed and executed in terms of variations under the offtake arrangements.

[Nicholas Read]

I think that just about covers it. Ken, I'll hand back to you.

[Kenneth Edward Brinsden, MD, CEO & Director]

Okay, thank you, Nick. Thank you, Bernadette. I think we're all done here. Thanks, everyone, for your participation today, whether it was on the [ Chorus ] line or the webcast. Much appreciated. David and the team stand ready, if there's any following inquiry to digesting the quarterly report. Thanks, everyone, for your participation today. And we look forward to speaking again soon.Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.