Pilbara Minerals Ltd

ASX:PLS

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by, and welcome to the Pilbara Minerals December 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, Rachel, and welcome to everybody joining on the call, and welcome to those participating via the webcast, especially those shareholders that have taken the time joining. It's much appreciated. Here in the Perth Pilbara Minerals head office, I'm joined by Dale Henderson, our Chief Operating Officer; and Brian Lynn, our Chief Financial Officer, both of whom you'll hear from during the call. Also in the office here with us, Alex Eastwood, Chief Commercial Officer, General Counsel; and David Hann, our Investor Relations Specialist. Thanks to everyone for joining. Well, the backdrop to the quarterly call is one of strong demand, accelerating price and in part Pilbara Minerals responding albeit with some production challenges evidence and especially during the December quarter. We've been continuing to work on the acceleration of Pilgangoora production in a very, very busy quarter as we started production at the Ngungaju plant. That is, just to remind you, the former Altura facilities. And we brought on the Pilgan Plant improvement project which is complete and now fully tied in, and we continue to ramp up the production at the Pilgan plant. In support of all that, a lot more site activity. And that includes relatively significant growth in mining volumes, which you can see in the production tables within the quarterly, albeit still having to go higher as we support production growth, both in the short and the medium term. And customers obviously want more products. You can see that with respect to pricing. Pricing is quite incredible, and that's something that I'll come back to talk to in more detail during our commentary. Yes, incredible results on our BMX platform. With respect to spot sales, very, very strong pricing, especially in China which is just reminding everyone is the world's largest within raw materials market. And that's now spreading to international markets with pricing hitting record highs virtually every week. And that's translating very well to spodumene, which is part of what, again, I'll explain in more detail, the reference prices at a headline lithium chemicals price and how that's playing to the value in the spodumene. I'm going to explain in a bit more detail there so that you understand some of the dynamics in the market. The ramp-up in production continues, albeit slower than we would like. Just to remind everyone, we're taking Pilgangoora production from approximately 330,000 spodumene concentrate tonnes per annum to 580,000 spodumene concentrate production. Big production growth and with that has come some challenges. But as always, the Pilbara Minerals team is working incredibly hard and carries some fantastic skills that we've learned over the years about how to bring that production on. Still targeting 580,000 spodumene concentrate tonnes by the run rate by the middle of this year. However, both plants are still in their ramp-up phase. And it's that issue combined with the effects of difficulties in the labor market and then more recently, community distribution of the COVID virus here in Western Australia. That means there is some risk to our ability to produce as hard and as fast as we would like. But nonetheless, a lot of work going on, as I said, and the Pilbara Minerals team carries all the right skills to make it happen, and we're obviously doing the best that we can. The POSCO downstream joint venture was executed during the quarter. And we're now going through the completion criteria for the final formation of the joint venture. In parallel, POSCO themselves have started the early work at the Gwanyang site, and they've confirmed that they'll start the significant construction work during the current quarter. So we're looking forward to their progress over approximately the next 2 years as we head towards Pilbara Minerals' first hydroxide production in joint venture with POSCO. So coming up, Dale will explain a bit more about what we're up to in both production and as we ramp up the plant and also production growth for the medium term. And Brian will follow up with some more commentary about cash flow generation and a little bit of a follow-up to the cost story. So on that note, Dale, over to you.

[Dale Robert Henderson, Chief Operating Officer]

Thanks, Ken, and good morning, everyone. I'll offer my commentary on 3 parts. So firstly, a little bit about the operations, a quick touch on the reserve update that we did during the quarter. And then to finish, I'll provide some consignment to the project space and expansion plans, which we've got coming up. So now with operations. As Ken described, it's been a growth quarter, bringing on 2 operations, ramping them, starting to ramp those up simultaneously. So growth quarter, but we've definitely had some growing pains. And Ken mentioned the labor shortages, which are happening across the state. Pilbara has not been immune to that, and we have found some of those pains end-to-end through our operations. That being said, the cornerstone still had fairly solid production at 84,000 tonnes at the low end of our guidance. Recovery, 62% average across both operations, yet again slightly below where we wanted it to be. Now stepping through the subset of the operation. From a mining perspective, it was a quarter of moving more waste that would add to the plan, but not quite the volumes we wanted to achieve. Again, a function of some of the labor shortages that our mining contractor is seeing. One of the consequences of this was slightly compromised ore and in terms of feed ore to the plant which translated through to a slightly lower recovery than we had planned. So a consequence there around mining movement. As part of the response to mining, during the quarter, Pilbara instigated our own mine fleet and mobilized our own small owner-operated fleet to support the South pit operation, which principally serves the Ngungaju plant. So we kicked that off during the quarter and pleased to report that, that started well. So moving from mining and stepping into each of the processing plants. So with Pilgan processing for the quarter, average of 65% recovery versus the plan of 75%, as mentioned earlier, slightly off where we wanted it to be. The improvement projects package, which is the debottlenecking project for that plant with construction complete commissioned, and we're really just moving through an optimization phase as we look to ramp up and increase throughput through that operation. From a cost basis, higher than we wanted -- where we wanted to be. A consequence of increased mine movements, some mining contract performance challenges that I mentioned. And in the plant space, the ore feed being slightly off where we wanted and some delays around commissioning for both plants, including some extended shutdown. So -- and in summary, quite a few contributing factors playing through your cost impact. And Brian will speak to this in a little bit more detail later in his section. So moving from Pilgan processing plant and now speaking to Ngungaju. The December quarter was the quarter where we had the ignition switch, so to speak. First concentrate from the core circuit coming through in early October. And that operation, we're moving it through a staged ramp-up with core circuit first floats to follow. Float circuit, we are on track to effectively start that ignition switch with the circuit in this quarter. So ramp up slower than where we wanted it to be, some maintenance issues contributing there. But all said and done, good to get the wheels turning and production team deployed from the operation. Lastly, on the ops update production guidance. You'll note from our update that given the labor challenges and some of the ramp-up challenges we've had, we're commencing a review and we will look to revise our guidance on the half yearly results when they come out due course. I think that completes the ops update. Moving to part 2 on the reserve. Just a note there that during the quarter, we did do a significant reserve upgrade. So this was a combination of bringing in the Altura reserve and resource into the existing Pilbara Minerals one. So big increase, 47% upgrade from the prior year to 162 million tonnes. A huge reserve upgrade, which, of course, supports the ramp-up we're doing and the progressive expansion plan. So lastly, the expansion plans, where are we at. So historically, we had talked about expansion in terms of Stage 2 and an incremental stages of Stage 2. We have dropped that naming convention and chose to revert to more simplified labeling for everyone's benefit. The P680 projects which it's now called is the next incremental expansion beyond the ramp-up that we're in the thick of at the moment. So this is to provide 100,000 tonnes additional to our total production capacity, bringing us up to 680,000 tonnes per annum. Where are we at with this project, we're in the closing stages of study work and targeting an FID in the June quarter, all going well. Beyond that, it's the P1000 expansion project, which is, as the name suggests, stepping up to 1,000 kilotons per annum and aggregate production from the operation. And we're targeting an FID for that expansion in the December quarter this year. And lastly, in the project space, the Midstream project. I would just remind everyone, it's the production of the value-added high-purity lithium chemical salt. Scoping study is in the finalization stage at the moment. We're also completing the economic evaluation for that and looking to announce that in the coming weeks. Beyond that scoping study announcement, we positively disposed just moving forward with that project with our partners, Calix, ultimately to commercialize that project and that approach and bringing what we think is a superior product to market. So we watch the space, and we look forward to updating you on that accordingly. So that's the wrap of the ops, reserve and projects. And at this point, I'll hand over to Brian.

[Brian Lynn, Chief Financial Officer]

All right. Thanks very much, Dale. And good morning and good afternoon, everyone. If I think about the financial impact of the quarter that we just had, I sort of put it in sort of 3 different aspects. One is obviously a very, very positive price environment, very strong operating margins generated but with some of the operating challenges that Dale has just gone through. We've obviously had some impact in terms of higher unit operating costs. In terms of the physicals. We produced just over 83,000 tonnes of spodumene concentrate and sold about 75,000 tonnes of concentrate that was produced from the Pilgan Plant and around 3,600 tonnes of concentrate that was produced from the Ngungaju plant. So that's coming through to an increase in inventory of about 5,000 tonnes, and we closed the quarter with closing stocks of about 16,000 tonnes, which represents about half a month's worth of production. In terms of price and operating margin. Now, I think everyone is aware, there's been quite an extraordinary improvement in pricing over the last quarter. And we averaged a price of somewhere between USD 1,750 to USD 1,800 a tonne on an SC6 basis. And just as a reminder, that compares to pricing of $850 to $900 a tonne that we achieved for September. So that's quite an extraordinary uplift in pricing. So with that pricing environment, clearly, we've generated a much stronger operating margin. So our margin was about [ USD 1,150 ] per dry metric tonnes for each for the tonnes sold from Pilgan, the 75,000 tonnes from Pilgan. So with that strong operating margin, there's been a significant increase in the company's cash position. So the September cash position was about $137 million, and that obviously is when we quote cash, we quote cash but the LCs as well for shipments that occurred in the quarter. So September, we're at $137 million. And at the end of December, we now find ourselves at $245 million. So that's an increase of just under $108 million. So where has that increase come from? So the cash operating margin at the Pilgan Plant was able to generate represents about just under $116 million for the quarter. We also, through the tonnes that we sold at Ngungaju, even though Ngungaju is still in ramp-up and commissioning phase, we actually still generated a positive cash flow of about $2 million following the sale of the 3,600 tonnes from the Ngungaju operation. Capital spend across the business was about 20 -- just under $27 million, and that's obviously money spent on the Pilgan Plant improvements on the restart of the Ngungaju operation and commissioning and also on the additional waste mining that's currently being undertaken. But that was largely offset by the drawdown of debt. So during the quarter, we took the opportunity to increase our debt facility with our banks by USD 20 million. That was done deliberately to help us fund the restart of the Ngungaju operations. So that USD 20 million agreement was signed up during the quarter and the money were drawn down in December and that was -- represents about AUD 27 million. We also paid about $2 million in interest costs from our debt, and we also paid a cash sweep under the debt facility of about USD 2 million as well. So at the end of the quarter, we end up with a $245 million of cash, and that represents a net cash position, so net of debt of around about $68 million. So clearly, this quarter has been a significant -- significant for the company and places the company in a much, much stronger financial position than we were at the start of the quarter. The obvious -- the one downside, if you like, for the quarter from a financial point of view is the unit operating cost. So the unit operating cost clearly has been impacted by the challenging operating environment that we faced during the quarter and was USD 587 a tonne which was about a USD 142 a tonne higher than unit operating cost for the September quarter. So that increase of $142, about USD 56 of that really relates to royalties. So obviously, if the selling price environment is going up, we are paying a much higher royalty. So about $56 of that increase related solely to the fact that we are having to pay higher royalties as a result of receiving a high selling price. The remaining $86 is really attributable to the fact that we generated lower levels of spodumene concentrate production. And this Dale alluded to really was as a result of plant shut down to facilitate the tie-in of the -- of the tie-in improvement projects at Pilgan. We had some unplanned downtime events due to some maintenance and equipment issues that needed to be rectified. We always ended up with a lower recovery, as Dale mentioned. This is really due to the fact that the ore feed being presented to the pipe wasn't as optimal as it should be. And then we were also impacted by the fact that there's just a lack of mining production and maintenance personnel in the market, which impacts how the operation gets run. Now if I think about those cost increases, yes, they are, I think unique to the challenges that we're currently facing. I don't think they are necessarily something which is going to be a permanent increase. And other than the higher royalty costs, which are linked to the selling price, my expectation is as we achieve steady state production from the operations that those costs will come back to the levels that we had guided to previously. As Dale mentioned before, we are currently undertaking a review of our production and whether we need to provide our production guidance. And if there is any impact of that production guidance on unit cost, then clearly we would be making that disclosure at the same time in late February when we release our half year accounts. So I think that's everything I wanted to go through. So Ken, I might hand back to you.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Thank you, Brian. Thank you, Dale. A bit more commentary about the market. And in particular, apologies in advance for delving into a little bit of detail about the pricing environment, but I think it's particularly important to explain how that works so that you have a greater understanding of the opportunity that the current market represents. Obviously, given where prices got to, there is a growing disconnect between available supply and surge in demand. Surge in demand is driven by all those things that represent opportunity in electrifying the global economy. But lithium-ion batteries are now key to that, hence, the growth in demand. On the supply side, without wanting to put words in other producers' mouth, I don't think their experience is necessarily any difference to Pilbara Minerals. It is tough to bring on additional capacity in an environment where you were previously being punished. Very low pricing environment have meant that every producer has slowed down. So I think it's highly likely that on the supply side, there will be challenges, and it's probably the case that the supplier response has already been overstated. So it's against that challenging environment that the price is surging. And it's kind of reverse. But for the very same reason that Pilbara Minerals had a challenging production quarter, you are likely to see pricing increase because the supply response is insufficient. I hope that makes sense. On pricing itself and delving into a little bit of the detail, Platts reported China domestic pricing in battery-grade lithium carbonate of CNY 386,000 per metric ton lithium carbonate equivalent basis. So that's over USD 60,000 per tonne in China. Now people will tend to want to dismiss that price because it's, I think, somewhat unfairly described as a spot price. But what's actually being discovered in that price survey is the real price being paid by the same relationship, i.e. a long-term seller and a long-term buyer who are constantly renegotiating the price and volume. So what it is, what it represents is the real price that the chemical conversion industry received in China, bearing in mind that China is the world's largest lithium raw materials market. And I think all the evidence points to that price being a real price because it's also driving international pricing, which typically has longer dated contracts. But international pricing is already approaching USD 50,000 a tonne. So for those that want to characterize it as a spot price, I think that's a little bit of a misrepresentation. It is the price that the chemical conversion industry receives. Well, why is that important? This is where the spodumene supply base ultimately have its day in the sun. And I think Pilbara Minerals is particularly well closed to participate in that pricing environment. What it means is that if the chemical converter is receiving USD 60,000 or over USD 60,000 consignment for their battery grade carbonate, if you deduct the VAT and you deduct the cost of chemical conversion, they have approximately $50,000 left to spend on their raw materials -- $50,000 left to spend on their raw materials, of which spodumene is obviously a key component. What that means is that the chemical conversion industry can pay a lot more for spodumene. And in my view, they likely will because there is no alternative. They already have chemical conversion capacity of which there is hurdles in China, but there is insufficient spodumene to backfill the chemical conversion capacity. The net effect of all that is that they will pass their margin upstream which means spodumene pricing is already very strong. But in my view, likely to get stronger. And I know everyone thinks that down like a pretty extraordinary scenario. But how to think about this, it's not iron ore. Spodumene is not iron ore. Spodumene and its derivative chemicals are part of an industrial mineral supply chain turning into a specialty chemical supply chain, for which most players will already be contractually bound. They are contractually bound to sell chemicals to a cathode materials player or a cell maker maybe in China, but equally, probably Japan and Korea. They are contractually bound, but they don't have the raw material. And what that means is that they will pay virtually anything for the raw material. So the dynamic that I'm describing is one that's very different to what most people might be used to in natural resources market. Because if you took iron ore as an example, that's a very large liquid pool of available product. That's not what's represented by an industrial minerals supply chain where people are -- have built purpose -- built in a purpose-built chemical facility to match a combination of input raw material feed for a defined quality, so a customer is probably a longer dated customer downstream. So all those dynamics create something that's very unusual in the pricing world, when there's such a bad disconnect between available supply and surging demand. So that's what's going on in spodumene market, quite incredible. I think Pilbara Minerals is really well placed. We probably outperformed as it relates to price received in the December quarter. And the March quarter is already looking very, very strong. So we've guided to between USD 2,600 and USD 3,000 per tonne CIF China on a 6% spodumene basis because we see lithium chemicals pricing being very strong, which represents a key peg to our spodumene price. So yes, incredible times. But nonetheless, Pilbara Minerals will be having its day in the sun. So that's the detail in the spodumene market. The other means by which we look to take advantage of that is through the BMX platform. The BMX platform will typically handle excess product from our Pilgangoora production, most of which is coming through the growth in Ngungaju production, which is coming. We've only been producing through the HMS circuit so far. We're continuing to chip away at that. And the flotation circuit with the expectation that the flotation circuit starts during the latter part of the current quarter. In which case, we should have more product available for the BMX platform and we're looking forward to the price discovery that, that flushes out. So to close. In summary, it's a challenge bringing on the 2 plants and the expanded capacity that they represent, especially in light of the tight labor market that WA currently suffers from. We're all looking forward to the borders opening because it ultimately, it should provide some relief to those tight labor market conditions. Thirdly, whilst that was a challenging quarter, it's not just Pilbara Minerals experience, we expect that just that every resources company is going through similar issues, including the other lithium raw material providers. What does that point to, well, it points to at least in past constrained supply, which points to probably higher price. We think we are really well placed to take advantage of that in the coming quarters. I'm confident in the team and their ability to bring on the remaining capacity, in which case we will have a very, very good year. Rachel, I'm going to throw it back to you. I'm sure there'll be plenty of interesting questions on the fine call, but equally some that will come out of our webcast. So yes, look forward to people's questions, and thank you, Rachel.

[Operator]

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

[Alistair Harvey, Research Analyst]

Ken and team, just a couple for me. Perhaps just starting with the recovery across Pilgangoora. Just wondering with Ngungaju, when do you think -- what's kind of the expected maximum recovery you think you'll be able to get there once you bring the floats online? And what sort of timing do you think we might be able to see that across?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, Al, in the detail there, Pilgan was compromised by the new equipment being brought on as part of the improvement project and the effect of a less than optimal blend so that we experienced recovery of Pilgan of sort of 65% versus 75%. And Ngungaju, the recovery is materially lower while we're using just the HMS circuit with the transitional ore. So nominally 30% recovery until we bring on the flotation circuit. Targeted recovery for Ngungaju over time with a fully optimized circuit is likely in the order of high 60s, 70% as compared to Pilgan being 75% for argument's sake.

[Alistair Harvey, Research Analyst]

Yes, that's really helpful. Just secondly, just on the FIDs for P680 and P1000. Just I'm wondering how long after FID, if they are successful, could work with you just given the tight labor markets you're seeing? And just any commentary you have on perhaps percentage increases in CapEx you've been seeing relative to prior study?

[Dale Robert Henderson, Chief Operating Officer]

Yes. I'll try to [indiscernible]. Yes, sure, I'll enter the timing around starting execution of those projects post FID. The good news is for the P680 could be fairly quick. That project is effectively an expansion to the HMS circuit. So the function of engineering, timing, long leads, we think construction could be as soon -- excuse me, as soon as 6 months starting as soon as 6 months post FID. But we wouldn't expect likely the ramp-up of that until maybe 9 to 12 months post FID. That's largely driven by our estimates around long leads. As to capital increase and cost increases, we've definitely observed escalation across the board in the WA environment, steel prices and the like. We haven't translated that through quite yet to the CapEx forecast for these particular projects. But of course, we will do that after the FID decision. Hope that answers your question, Al.

[Alistair Harvey, Research Analyst]

Yes, Dale. And just maybe with the P1000, do you think that will have a longer build time frame after FID, just given that's a bit bigger?

[Dale Robert Henderson, Chief Operating Officer]

The -- one of the questions we haven't resolved yet is actually the staging of that particular part of expansion. It's potential that we might choose to forward order long leads. And the long leads, so based on those 2 expansions really drive the critical part, not so much in our view a labor constraint. It's more long leads. And as it relates to the P1000, the good news there is we already have the HPGR for that circuit. So for us, it would be really around looking at ball mill timing and the float sales principally and all the other things that are largely enhanced. So we could be well placed potentially to move fairly quickly with that one.

[Alistair Harvey, Research Analyst]

Right. If I can just sneak one last one in. Just wondering if you guys have a rough split of Pilbara's product that goes into the hydroxide versus carbonate converters and whether or not that's changed substantially since we've seen these bigger increases in carbonate pricing versus the hydroxide price.

[Dale Robert Henderson, Chief Operating Officer]

Yes, our customers -- the contracted customers do a mix of both. So it's very difficult to determine exactly how much goes into the carbonate chemical fleet versus hydroxide. But to be honest, in today's environment, you could be ambivalent about it because any primary hydroxide producer, i.e., straight from spodumene to hydroxide is probably treating hydroxide to carbonate, a very low-cost process of carbonation to take advantage of the carbonate price. So -- and actually, in the scheme of things, they're doing that for roughly the same cost as the cost of chemical conversions carbonate anyway, because the primary hydroxide route would typically be a bit cheaper. So from our point of view, we're not overly fast -- kind of one way or the other where it's ultimately being consumed. But given the price differential between carbonate and hydroxide, that's very much a likely market response twisting hydroxide to carbonate.

[Operator]

The next question is from Mitch Ryan from Jefferies.

[Mitch Ryan, Equity Analyst]

Just of note, but I just wanted to understand just [indiscernible] one of the [indiscernible] fact that we ramping up everything hydroxide refinery, and we [indiscernible] and we now expect [indiscernible] to look for you to be in [indiscernible] platform. And so just wondering if that would be a material that would be in a [indiscernible] if that would be material to you.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, good question, Mitch. And it's hard to disagree with the logic that says the more volume and the more price points that are established on such a platform, the better the combination of price transparency and market development for more sophisticated market tools to emerge. So broadly speaking, we're supportive of an objective that creates more product pricing on things like the BMX platform. So we're very open to those discussions. And it won't surprise you that those discussions are already underway. It seems like a very, very logical model to deploy. And the industry is absolutely crying out for stronger price transparency.

[Mitch Ryan, Equity Analyst]

So in light of that, I guess, you weren't necessarily looking for a commercial benefit -- a material commercial benefit, it would be more about the improved transparency of the market would benefit all players involved in this?

[Dale Robert Henderson, Chief Operating Officer]

That's right. Rising tide floats all boats. So yes, it's pretty much that logic. And ultimately, it's going to be good for the market as a whole because it's more sophisticated to the pricing methodology out there. We're not interested so much in the commercial potential in that model, just broad participation across all products. And in fact, Pilbara Minerals itself is also keen to put more price points on the platform, i.e., the area in spodumene grades and over time, midstream products. And who knows, maybe our own lithium chemicals over time.

[Operator]

The next question comes from Jack Gabb from Bank of America.

[Jack Gabb, Vice President]

Just a couple of questions from me. I guess, firstly, just on the labor challenges, in particular with respect to some of the stripping. I guess, this year was going to be a bit of a catch-up year for stripping rate. I'm just curious, is this going to pose a challenge at some point? Is it going to create a bottleneck for you as you look to expand? Or are you -- we've got quite a lot of headway on that. And I've got one more question. .

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, Jack, a couple of introductory comments on that subject and I'll hand to Dale. Yes, you're right. This year is all about catch-up, and we had about sort of 15 to 18 months' worth of higher than life of mine strip to catch up. That's necessitated mobilizing more fleet and larger fleet. It's been constrained by labor so that's part of the challenge. Dale, is there anything else you want to add?

[Dale Robert Henderson, Chief Operating Officer]

The only thing I would add is with the acquisition of Altura presents more opportunities in terms of access to all. So without question, there's a heap of material to move base movement. But we do have multiple areas to draw from. So that puts us in fairly good stead as we think about our various mine plans, et cetera. That's all I'd add.

[Jack Gabb, Vice President]

Perfect. And then just one on pricing. Can you give us a sense of the range, I guess, of your pricing that you actually received across your contract, ignoring BMX for a second, within your guidance? And then secondly, within that guidance as well, are you including any material volumes from the BMX platform at this point for Q1?

[Kenneth Edward Brinsden, MD, CEO & Director]

So Jack, on second question first, in fact, what we've described in the quarterly USD 2,600 to USD 3,000 per tonne represents an estimate of contracted pricing based on what we see today. So it's only contracted pricing excludes whatever might yet occur on the BMX platform. And I might just add that there's probably a risk to further upside as a function of the speed with which chemicals have accelerated. Yes, sorry, the first question. Actually, it's a relatively tight contract pricing across the customer group. There's really no material difference emerging in respect of the various pricing models. So they've pretty much approximated each other within a couple of hundred dollars of each individual contract. And they do vary over time because they do use slightly different pricing modeling, but it's in the detail. They all referenced lithium -- well, typically all referenced lithium chemical potentially in a slightly different way, but the net outcome of the pricing is pretty tight.

[Operator]

The next question comes from Peter Curt from the Australian Financial Review.

[Unknown Analyst]

Just wondering on the border, I assume you're not going to join the exodus of all the other WA-based CEOs who are coming East. And secondly, with the February 5 delay, did that append any plans you had in terms of did you have particular markets on the East Coast you were targeting as of Feb 6? And how do you sort of cope now with that sort of indefinite uncertainty?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Good question, Peter. I can assure you, there was lots of tears in the Brisbane household with the borders being shut post February 5 given kids in their locations and the desire to catch up with them. With respect to work, not my intention to merge Melbourne or Sydney, not anytime soon. And given the trust plans, well, it's an indirect impact of the border that it constrains short-term labor supply. So that actually gets to the heart of a lot of the issues that we've been dealing with, especially while we're ramping up the 2 plants. When something breaks or when we've got to do a shutdown, you typically can't get the labor, at least not in the way we're used to, to create the peak load that's required to get the jobs done quickly. So a shutdown that should have taken 36 hours takes 72. And a broken ball mill coupling takes sort of 56 hours to fix when it should have taken 24 in that type of thing. That's really one of the key issues. And then our contractors, the mining contractors feel it as well. They typically have a slightly higher sort of transitory workforce, and they're highly mobile. And what's happening now is everyone's fishing from the same pool in that contract space. And that's leading to loss of some challenges accessing labor and hanging on to labor for our contractors. So if the borders being continue to close, creates challenges in that key personnel and the extent with which our contractors can retain their personnel. So it's a big issue. The sooner the borders open and we get the mobility back in the workforce is really the key.

[Unknown Analyst]

And so presumably, you think the negative impact of those labor challenges is greater than the COVID impact will be when it starts spreading through your workforce as it is over here?

[Kenneth Edward Brinsden, MD, CEO & Director]

Definitely some risk to the production environment for WA mining companies, no 2 ways about it should be relatively transitory. I mentioned in months, a couple of months, not 6 to 12 months.

[Operator]

The next question comes from Adam Baker from Global Mining Research.

[Adam Baker, Mining Analyst]

Just a question on the mine grades. They've been above reserve grade at 1.18% for quite some time. Just wondering what your mine plan is saying about coming back to meet reserve grades. How far off are we from that?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, good question to pick up, Adam. We've been reasonably clear historically that Pilgan or the original Pilgangoora operation was always mining at slightly higher grade in the first 4 years roughly of production. That's just a function of the way the ore presents at Pilgangoora. So nothing particularly sort of tricky there. The lower reserve grade also has resulted from the addition of the South pit, i.e., the former Altura operations, which again was always a lower reserve grade than the original Pilgangoora reserve grade. So that also explains some of the gap. Yes, so we've been in production now for 2 or 3 years. So we've got another year or 2 worth of slightly elevated grades and then it'll start to revert more to the reserve norm.

[Adam Baker, Mining Analyst]

Sure. And just a second one. Yes, you mentioned that there's going to be a potential review guidance over the half year result in February. I'm guessing there will be some impact to the second half financial year '22 guidance. But just wondering how likely this is the impact of the target of 540,000 to 580,000 tonnes of spod cons by midyear?

[Dale Robert Henderson, Chief Operating Officer]

Yes. And all discussions come, given that we've got about another 4 weeks prior to the half year results, there are several things going through our mind there. And the next 3 or 4 weeks will probably be formative. The first is the effect of the continued plant ramp up. There's a big gap between the historical production of 350,000 spodumene concentrate tonnes per annum compared to where we're going, 580,000 spodumene concentrate tonnes per annum. And our guidance is sensitive to the speed with which we can bring on that capacity. So we really need another 3 or 4 weeks to see how we go with the plant and the work that's already happened and integrating the combination of new equipment, especially Ngungaju where we're bringing on the flotation circuit. So that's part one. As to absolute production capacity, i.e. 580,000 tonnes, well, we're still confident about hitting that run rate in the middle of the year as a function of both plants and their performance. So the business we're sensitive to is the remaining ramp-up. Lastly, it's worthwhile mentioning the borders and COVID, there's obvious community transmission going on here now. Mining companies are going to start feeling that. So we are a bit sensitive to what that impact might be. Now indirectly, it's already hurt us because we struggled to get these people, as I described. But it's possible there's also production impacts from the community transmission and how that relates to our available workforce. So give us another 3 or 4 weeks, mate, and we'll have that largely cleared up and we'll provide more definitive guidance.

[Operator]

There are no further telephone questions at this time. I'll now hand over to Nicholas Read for any webcast questions.

[Nicholas Read]

Thanks, Rachel. We have a number of questions that have been logged online to the team here. Firstly, some questions from John Betworth. He says, "Could you please expand on the company's strategy and the initiatives that have been put in place to deal with the current skills and labor challenges and risks in WA?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Good question, John. And yes, of course, there has already been actually a significant response. So the first thing is to towards on some of the challenge ourselves. Pilbara Minerals has commenced its own mining fleet. And the logic in doing that, it's multifaceted, but one of the key drivers is the relative accessibility of longer-term employees buy Pilbara Minerals as compared to our contractors. It's also to do with the way the workforce works here in WA. Most employees, not all, but most employees would say longer-term employment with an established company is a facet of that. And I think we also trade on the benefit of being involved in the new economy in mining, battery raw materials, which is seen as the future. And hence, that brand has a better attraction and retention status. So that's a key thing that we've taken on ourselves. And so far, so good. We haven't had too many dramas accessing people ourselves. But certainly, our contractors have. There has also been work on with respect to retention. So for example, the way we pay our people, the bonuses, the net benefits, we've done work on counts. There's lots of things that have happened that should have the desired effect of both attracting and retaining people over time. With respect to our contractors, where we've done a bit more sort of innovative thinking with them. Again, rosters, the can and in certain circumstances, the way they are incentivized with a view to helping attract and retain people. The one key challenge, which we still haven't really broken the back of is the peak labor that I described when you need such large numbers of personnel for shutdowns and/or breakdown. That is an area that's still of concern. And again, not a challenge that we're dealing with on our own. It's for all a very broad issue for the mining companies here in WA generally. I hope that makes sense, John.

[Nicholas Read]

Thanks, Ken. Two others from John. He asks: "The pull back in the share price over the last week or so, how much of that would be attributed to the broader global market correction and how much to investor concern about the risks and challenges that are being discussed today? And secondly, can you update us on how the company is thinking about dividend policy, given the strong performance financially in recent times?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, with respect to Pilbara's share price, I think it's largely traded in line with its peers. I don't think there's anything particularly special that's going on there that relates to Pilbara Minerals specifically. It wouldn't be unusual to have a pullback when -- well, when lithium stocks have run as hard as they had, but also taking into account broader sentiment issues in global markets. The sector of inflation has clearly led to a bit of a risk-off attitude. Now I would attribute most of that to the share price movement to that effect. Second question is on dividends. As described by Dale, we have a lot of growth ahead of us, which we think represents a reasonable reinvestment in our business. That's important. And ultimately, it depends on what the price does. But price versus cost will be one of our assessments as to whether dividend ultimately become part of the story for the medium term. So more to be covered in that regard, John, before we can be definitive about dividend stream.

[Nicholas Read]

Thanks, Ken. A question from Rob Clark. He says, "With respect to your impressive balance sheet strengthening, does your Midstream project warrant more resources? And can you look at ways to increase the speed to market of this product? Also can you please clarify the product that's being targeted directly at Chinese LFP cathode makers?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, both good questions. Well, we very much like the Midstream product and Dale said, I think the word is something like a very competitive product or a compelling product for the market, something like that like. I agree wholeheartedly, a compelling product to the market and recutting the spodumene supply chain is going to be a big part of the future of our industry because there are more efficient solutions. So we're working with our partners as fast as we can on that project. Really happy to be working with Calix and their smart team. But it still got engineering development to be undertaken, and it's very difficult to short circuit that. So more work to be done and probably more to be said about that as we look to publish the first round of engineering in the coming weeks. I think that's pretty much it.

[Nicholas Read]

Next question is from Hayden Bairstow of Macquarie. He says, "Is the long-term production target post the expansion still approximately 1 million tonnes per annum or having made some changes to long-term recovery assumptions? And secondly, what percentage of sales in 2022 are likely to be on the BMX platform?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Okay, yes. Yes, so long-term production, Hayden, is still targeting beyond 1 million tonnes per annum of spodumene concentrate. And broadly speaking, that should happen in the period sort of 2000 -- the latter part of 2023, early part of 2024 onwards. Now more work to be done from an engineering and a delivery point of view, but we have no doubt that Pilgangoora as a production center has that capacity, and it will be a very important part of global supply. So yes, very much still in the picture. With respect to recovery, there's actually no -- nothing has changed with respect to our views around recovery. Consistent with previous commentary, slightly lower recoveries at Ngungaju, just as a function of the way that plant works in comparison to Pilgan and the slightly lower head grade overall likely to be fair to Ngungaju over time. But recovery is still the same. And the floatation is still a very important part of the future at Pilgangoora, whether at Pilgan or at Ngungaju.

[Nicholas Read]

Okay. So [indiscernible] to the BMX platform?

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, there's just some uncertainties. So that's a function of how quickly we can bring on the remaining capacity at Ngungaju. From a production point of view, it's still relatively early days because we're only relying on HMS in the transitional ore. The flotation circuit construction is well advanced. We're into the sales now and still expecting that those sales will be fired up. From a construction point of view, we're finishing off the last of construction in the sales to align with our flotation technique and a view that they'll be commissioned from later in the March quarter. So then the question is how quickly we can bring that on to bring on additional capacity because it's that capacity and then whatever we could stretch Pilgan to, that become excess capacity to go to the BMX platform. So it's difficult to be definitive to be honest, Hayden, about what ultimately gets sold on spot this half. Once the plant is at full capacity, so 580,000 tonnes, then approximately 200,000 tonnes of that is available at our disposal to sell as we choose. And at the moment, we would choose to sell by far, the majority of that to the BMX platform because pricing is going to be very strong. Chemical conversion industry is going to give away their margin to secure a spodumene supply. In which case, spodumene supply bulk pricing will surprise the upside.

[Nicholas Read]

Thanks, Ken. There were a couple of other BMX questions. So I'll just group them together and apologies if we're going over the same ground here, but one was to confirm, are you expecting a BMX auction this quarter?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. That's our hope, yes.

[Nicholas Read]

And the second was if all goes well with the Ngungaju plant, can you give some sort of estimate of how many BMX sales and tonnages in total we'd be expecting for this calendar year?

[Kenneth Edward Brinsden, MD, CEO & Director]

I guess, similar to my previous comments about the speed with which the Ngungaju plant comes on, I can be more definitive about once the capacity is being built out because then you would have approximately an auction every 3 weeks roughly, as represented by the total excess capacity that makes its way to the spot market.

[Nicholas Read]

Great. Thanks, Ken. A question here from Mr. Mills. He says, "As the company moves relatively quickly to P680 and P1000, what concerns should there be or are there with shipping movements to markets given global shipping challenges and increased costs?"

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, our experience is that we don't have difficulty accessing vessels. There's enough trade and vessels available in our sector. So we don't, in particular, have difficulty accessing the vessels themselves. It's just the cost of attracting the vessel, that's the issue. There has been some relief -- a little bit of relief in this quarter with respect to shipping costs. We peaked in shipping costs at about USD 70 to USD 80 a tonne. Average shipping costs from memory were about $55 or...

[Dale Robert Henderson, Chief Operating Officer]

Yes.

[Kenneth Edward Brinsden, MD, CEO & Director]

So it's come off slightly, which is indicative of more vessels being available. But I'll again make the point, it's not so that you can't get a vessel, it's just the cost of the vessel itself.

[Nicholas Read]

Thanks, Ken. Just a couple of market-related questions to wrap up. First one from [ Mr. Zener ]. He asks, "If you can offer some commentary on the impact on the lithium market of some recent developments we've seen, for instance, the Rio Tinto project in Serbia and also some of the political changes in Chile and any potential ramifications of those developments for lithium supply."

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, the first thing that comes to mind and no disrespect to the analyst community, but it's easy to put supply numbers in a spreadsheet. It's not so easy to deliver them on the ground. By the time you're doing that, a lot more complexities come into play. You've heard from Pilbara about difficulties in bringing in additional capacity. Well, our experience is not -- we're not on our path alone. Bringing on spodumene supply and lithium units globally is challenging. And especially when you think about the combination of volume, volume growth and quality. And each of those are going to be overestimated in our view in which case markets will continue to be tight for quite some time. We've heard many analysts over the years that the lithium markets will be oversupplied. There's plenty of lithium in the world, but there's not plenty of lithium in the world that fits the right combination of location, quality of supply, accessibility to infrastructure, in the right jurisdictions that don't otherwise suffer from geopolitical challenges. Yes, I mean, it's a complex world of industrial mineral supply chain that doesn't want to be complex but naturally is.

[Nicholas Read]

Thanks, Ken. One final one. It's a reminded question, but a good one to wrap up on. A gentleman said, "Major car manufacturers are talking big numbers for EV production through to 2030. Is there enough lithium to achieve those production forecasts?"

[Kenneth Edward Brinsden, MD, CEO & Director]

I don't want to be trite, but car makers have been asleep at the wheel. They haven't been paying enough attention to the raw material supplier in battery raw materials in the last 5 years. And it's coming back to haunt them. Because insufficient incentive was placed in the market when it was really required and especially sort of in that period, 3 to 5 years ago to get to where we need to be today. So not enough capital flowing upstream, not enough definitive offtake agreements that tie up the supply chain, not enough interconnected agreements that motivate the supply chain to be interconnected. Each of those things represent a serious challenge to the industry that should have been solved some years ago, but now needs to be solved and will take some years to get right.

[Nicholas Read]

Excellent. Thanks, Ken. That's all from the online.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, Nick. Rachel, it sounds like we're all done.

[Operator]

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