Pilbara Minerals Ltd

ASX:PLS

Earnings Call Transcript 2019-Q3

[Nicholas Read]

Thank you, Jesse, and good morning to everyone. Thanks for your time this morning. On behalf of Pilbara Minerals, I'm very pleased to welcome you to the company's March 2019 quarterly analyst and media conference call and webcast. This follows the release on the ASX platform this morning of both the company's March 2019 quarterly activities report and an associated quarterly update presentation. Leading today's call for Pilbara Minerals, I'll shortly introduce the company's Managing Director, Ken Brinsden; and Chief Operating Officer, Dale Henderson. Just a couple of brief housekeeping matters. Ken and Dale will open proceedings with a short presentation of the quarterly results before handing back to the moderator to open the call to questions. Please note that shareholders and other interested parties are welcome to listen to the live webcast of today's call, which is available through the BRR Media service using the link provided in the quarterly and on the front cover of the presentation. A recording of this webcast will also be available at the same link shortly following the conclusion of the conference call. Shareholders with questions for Pilbara's management team are welcome to send them to [e-mail]. I'd now like to hand over to Ken Brinsden to kick off this morning's proceedings and begin with the presentation on the quarterly results. Thanks very much, Ken, over to you.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, Nick, and good morning to all those who joined the call, and special welcome to Pilbara Minerals shareholders via the webcast. Lovely to be with you and happy to share the information arriving from the March quarterly report. Joining me here in the Pilbara boardroom are Dale Henderson, Pilbara's Chief Operating Officer; and Brian Lynn is also joining, our Chief Financial Officer. And both will be available for the purpose of questions arising as a result of the results and the call. And as I said, very happy to share the results of the March quarterly report. And as always, it's been a very, very busy quarter for Pilbara Minerals with plenty of highlights to share, the first of which represents the culmination of the declaration of commercial production effective the 1st of April. And that's an assessment that's occurred over many months as it relates to the continued commissioning and the ramp-up of the Pilgangoora plant. And through a series of definitive assessment by the combination of the management team, the Board and also in consultation with the auditors, the company was pleased to declare commercial production arising from 1st of April and as a result of prior quarter's results. Continuing the theme, in March, more sales, albeit slightly impacted as a result of the confluence of events around Cyclone Veronica. Whilst there was no direct impact from Cyclone Veronica at the Pilgangoora site, there was a lot of rain. And that rain, at least in a small way, has impacted our ability to push the vessels out in the March quarter, but also had some minor impacts to mining, [ sharing that ] and especially the latter part of March, which has a flow-on effect to the April processing result. But in any case, there has been steady production growth continuing to occur, combination of our continued throughput through the plant. The plant has proven its capacity to handle the designed tonnes with pretty much nameplate capacity quarter-on-quarter now over about 6 months and a trend towards continuing improved lithia recovery. Dale will address recovery in more detail, but the broad thing is there's been some really important learnings coming out of the plant's operations, some more valuable learnings to the operating team in the March quarter. And those lessons translate into modifications in the plant that are continuing to improve lithia recovery performance. And we have some results to highlight from the latter part of March and April that demonstrate continuing improvement. It's also been a very busy period as we continue to consider the growth of the Pilgangoora site's production. It's an outstanding endowment -- mineral endowment at Pilgangoora, huge resource, very large reserve. And all of that translates to the opportunity to continue to consider expanding the mine's capacity. So we completed the Stage 3 scoping study, which has hit production growth up to 7.5 million tonnes per annum. And that's been assessed by engineering teams as they look at the combination of equipment performance to-date, the equipment available for future expansion, crushing capacity, heavy media separation capacity, floatation capacity, and all that's been used to culminate in a proposed expansion to 7.5 million tonnes per annum. And with that, we announced a partnering process that looks to interconnect the available offtake from the expanded plant capacity to future chemical capacity and, in particular, where we have an opportunity to continue to participate in that chemical conversion processing. Now that process is now well underway, and we're happy with the continued progress in that regard. So continued growth available at Pilgangoora through our Stage 2 and Stage 3 expansions, and we believe strong appetite from the market to look to participate in a successful and an operating mine with scale and a long mine life, like Pilgangoora is. Elsewhere, we've continued to progress the proposed POSCO joint venture, the idea there being that we continue to work with POSCO or underwrite the supply and work with POSCO on new chemical facilities in South Korea of up to 40,000 LCE and to interconnect that with Pilgangoora offtake. And we're really happy with progress in the relationship with POSCO. Very, very capable team and fantastic technology that they are looking to deploy to create a very high-value hydroxide -- principally hydroxide product for the Korean market where the Korean battery manufacturers are a very important part of global growth in lithium-ion battery supply. And especially for the big name brands in the car or vehicle world, Korea has become the go-to location for growth in lithium-ion battery capacity for the next wave of electric vehicles. And we're very happy to be a part of that important supply chain. Lastly, we finished the Ganfeng placement. 50,000 -- sorry, AUD 50 million. We welcome Ganfeng as Pilbara Minerals' largest shareholder. They're a very important part of the Chinese battery supply chain, a very diversified product mix. And we're happy to be working with them as they continue to grow their production base, in part underwritten by a strong growth in Pilgangoora spodumene production. That's the highlights for the March quarter. I'm going to hand to Dale now, and Dale will talk to Slide 5, where we are addressing production growth and some further discussion about recovery. Thank you, Dale.

[Dale Henderson, Chief Operating Officer]

Yes. Thanks, Ken, and good morning, everyone. So just offering a little bit more detail into the production performance. And just to start with, this was -- the March quarter is our third quarter bringing the operation to life. And just to characterize the March quarter. Quarter 1, when we commenced financial quarter 1 was really around construction, completion and commissioning. Quarter 2, the December quarter, was really around the completion of commissioning and ramp-up. And as we have gone into quarter 3, the focus has really been around optimization. And that's culminated, as Ken mentioned, in the commercial production announcements commencing from 1 April. So quarter 3 performance generally has been very, very positive. The commercial production attainment speaks to good production volumes, good feed rate, consistent product quality achieved and lastly, continuing improvement and recovery. And recovery being really the last piece of the puzzle that we need to continue to improve to reach nameplate. All other performance characteristics are achieving nameplate at this point. So March quarter, looking at the volumes produced, 52,000 tonnes of spodumene for the quarter. That's almost 10% up on the previous quarter. Tantalite, slightly down from the previous quarter at 33,000 tonnes. That decrease is actually due to a change in the ore feed. Moving down to stocks. Fairly consistent volumes between quarter 2 and into the March quarter. There has been some reclassification of early ore, early ore being some of the contaminated ore on the ore boundaries and some of the transitional ore were reclassified under that early ore. So for anyone trying to reconcile, there -- you will find some differences there. Moving onto Slide 6. In terms of the production trends, as you can see from the graph, there has been continued steady improvement in production volumes month by month, which the team is delighted with. The March quarter wasn't without its challenges, however. We had a couple of mechanical challenges within the plant specifically relating to a liner within the flotation area, which had deteriorated. That was resolved. Within the core circuit, we also had an issue relating to dense media that included silica. That, of course, was identified and resolved, but the net effect of that did take a bit of an impact to recovery during the month of February. The other key challenge which Ken mentioned was Tropical Cyclone Veronica. As Ken mentioned, it didn't directly impact site. But indirectly, it did through dumping a lot of water. What that meant was our mining sequence changed, which meant that we've had to, in the last couple of weeks, bring some ore feed, which is slightly lower grade to the plant, which was not as per plan, but we're now moving past that right now. So that effect has been mitigated and has been resolved. But the long-run trends continue to improve. April itself is certainly shaping up to be another improvement, keeping with the trends improvement, so we're happy about that. In terms of recovery, I mentioned that recovery is really the last piece that we're looking to optimize to achieve nameplate. Pleased to say we've continued to make improvements in that regard. And the most recent steps of sitting around 80% -- 84% of nameplate, so 84%, 85%. So that's going well. And that improvement in recovery is -- has really been owed to improvements specifically around flotation, optimization improvements from there. So we're happy with that, and that's good. We have further optimization to continue, which we will carry on with. And we plan to essentially complete the optimization to achieve nameplate within this calendar year. So over the coming months, we will continue to ratchet up and eke up that average recovery over the coming months to reach nameplate. All right. So I think that summarizes production data for the quarter. Back to you, Ken.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, Dale. Yes, so some important lessons for the operating team that come out of the March quarter. Whilst a bit of a frustrating period for us, the valuable learnings are contributing to continued improvement, and we'll be able to leverage those into continuous improvement in recovery performance. Thanks for all your input there, Dale. Moving on. With respect to commercial production, we've already addressed that earlier in the introduction, but an important milestone for Pilbara as we continue to ramp up the plant's capacity, demonstration of capacity with some discrete review of our key production areas or production feed grade, product quality and, ultimately, recovery rate, each of which has ticked the box to facilitate the transition to commercial production from the 1st of April. With respect to the POSCO joint venture, we continued with the process of due diligence and continued discussions with POSCO in relation to the financing and final joint venture terms. We're happy with progress there and expect that we'd be able to make continued progress with the proposed POSCO chemical plants joint venture with resolution during the June quarter. The cash balance has grown as a function of the completion of the Ganfeng placement and also as a result of the continued sales environment, spodumene concentrate and tantalite concentrate. But you'll note that we've continued to increase the stock's position. That's true with respect to both ongoing working capital, but also as a function of the delayed shipment at the end of the March quarter, where we had in the order of 10,000 to 15,000 tonnes ready for sales, which has subsequently shipped during the month of April. Moving on to the market trend. I think the broad comments are that the China market has continued to have -- well, I think it's probably stabilizing, is probably the best way to describe it. You can see that as evidenced by the China price in the domestic market. And as I would typically say, whilst some people try and excuse the China domestic price as a spot price, it is true that it's a shorter-dated price, but very large volumes are written in big contracts between big buyers and big sellers in the battery industry at that price. So as a function of our spodumene participating in China's chemical conversion capacity today, that represents the most relevant price for the pricing outcome in spodumene. We sold our SC6 product, 6% lithia. As defined by the recovery rates, we'd always quote the recovery rate with the product grade because they are both inextricably linked. You cannot separate the 2. 6% for approximately USD 675 a tonne, and that simply reflects the -- pretty much the fall in the price in the second half of last year in China. But as a result of the price stabilizing or generally stabilizing in the China market in the period over the last 3 months -- 3 to 4 months, we would expect the spodumene price to also start to stabilize. It's possible that it comes off a bit more, but we don't expect any precipitous falls in the spodumene price from here. Elsewhere around the world, as I alluded to earlier, the Korean market is very strong, and there is now a premium in the Korean market, especially for battery-ready hydroxide. That's because of the very strong growth going on in markets through North Asia, ex China. In fact, our Chinese customers that are participating in the battery industry would also say the demand is strong for our battery-ready product. And that's the important distinction that people should note with respect to pricing. Battery-ready products, people that are qualified participating in those markets are going to be receiving the best price because that's where the demand is in the market, whether you're talking about China or ex China. Lastly, the partnering process, there's really not that much more we can say other than to say that the process is now well underway. And we look forward to fleshing out opportunities in the market to interconnect more offtake from the Pilgangoora site to future chemical facilities. I've had people ask me why would we launch such a process now. Well, really what it comes down to is that anybody who's thinking about chemical conversion capacity knows the lead time to build out that capacity, something like a minimum of 2 years, but probably 2 to 3 years. And as such, if they're going to build chemical facilities, they need to be able to put their finger on the available spodumene supply. And that time frame loosely fits with the time frame within which we would look to continue to expand the mine capacity to -- or from Stage 2 at 5 million tonnes per annum to Stage 3 at 7.5 million ore tonnes processed. So it's important that those conversations happen now, so that people have visibility through to expanded chemical conversion capacity. And as and when developments occur, we'll be keeping the market informed. On Slides 10 and 11 of our presentation materials, really we're just addressing the key value propositions that people are looking at Pilbara Minerals and our Pilgangoora Project for. It's a long-life asset. It's high grade. And especially, once you include the valuable tantalite by-product credits, it's going to be a long-life, high-quality operation. And that's really what people are looking to participate in. Perhaps even more important than that now, it's also a proven operation. We've demonstrated throughput through our Stage 1 plant, proven subcomponent capacity and a pathway through to design recovery. With all those things in mind, we think, and we believe other key people within the lithium ion supply chain view Pilgangoora in a positive light. And we're looking forward to what the mine is capable of over the remainder of 2019. That's all we have for you today in the way of our formal presentation materials. But Nicholas, I'll hand back to you or the operator for the purpose of Q&A. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Nick Herbert from Crédit Suisse.

[Nick Herbert, Research Analyst]

Firstly, really good to see that recovery improvement in April. I'm just wondering if you could just go about a little bit more detail and the recovery trajectory overall you're expecting over the next couple of quarters as you're working towards nameplate. And specifically for the June quarter, what should we be assuming? Is it reasonable that, that 65% rate that you've reported in April is a floor? And for the quarter, should we be expecting a little bit higher than that? That's question one.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thanks, Nick. Good question. I'll hand onto Dale and he can address that.

[Dale Henderson, Chief Operating Officer]

Sure. Thanks for the question, Nick. In terms of the recovery trajectory, from this point onwards, it's very much an asymptotic profile, meaning that the incremental recovery ones become smaller and harder to get as you move up the curve. So our guidance has been around achieving nameplate recovery by the end of the calendar year. And the reason for that is that point that the early part of recovery code is -- are easily more won. And then as you get up the recovery curve it gets harder and harder. To your question on assumptions around recovery, I would take the recent performance as the new floor. And the rate of improvement from this point is really subject to how rapidly we can move through those other incremental pieces. But I think that's about as much guidance as I could provide in that regard.

[Kenneth Edward Brinsden, MD, CEO & Director]

And Nick, let me add -- just let me add a couple more key points. There are those that say 65% represents the threshold, i.e., we cannot get any more than 65%. And we do not -- fundamentally do not agree with that premise. What gives us confidence that there's a pathway between now 65% and 75% is that, in parallel to day-to-day operations in the plant, we run flotation in parallel with the same ore, the same water, the same reagent dosing. In fact, in some cases, the actual ores that have already been dosed with reagent in the [ leads ] adjacent to our plant at site, we're doing that on a shift-by-shift basis. And what that demonstrates is that the recovery, in fact, meets design. So depending on the ore type, we would range between, say, approximately 73% recovery and about 78% recovery in the lab. And what that tells us is that there is no fundamental floor in the original metallurgical test work that's supported the project. There's nothing wrong with the water. There's nothing wrong chemically, nothing wrong with the ore that can't otherwise be addressed in the plant. It's just a physical operation. So what that means is the confidence comes from the parallel test work that's happening on a day-to-day basis, demonstrating the pathway to design. Now admittedly, that is going to take a bit more time than originally envisaged, but that's principally because of the physical operation of the plant, that is optimizing the physical action of flotation -- well, mainly flotation, it has a little bit to do with DMS. And that's going to take some time, twisting the dials, changing the knobs. But as to our ability to get there, we still remain confident. Thanks, Nick.

[Nick Herbert, Research Analyst]

No, that's great. Then just a question on sales. You experienced any pushback on orders from your off-take partners? And I guess just scoping out sales versus production expectation, just what you're thinking in terms of that inventory build. Obviously, you get that 10,000-tonne catch-up from the missed shipment in the current quarter, but just trying to think about what would -- what should we be assuming for sales relative to production on a go-forward basis?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. We remain confident in our ability to sell the site's production. Now in the December quarter and the March quarter, we probably have carried more stock than we would have originally envisaged. That's not necessarily as a function of demand from the customer base, albeit they are taking some time to commission their plants in the same way that we are taking some time to commission or ramp up our plant capacity. If anything, stocks at site or at the port is more a function of us getting ready for the product for sale. So for example, at site, we are going to have to carry a bit more stock than we had originally assumed, and that's to allow time for drying basically, draining of the product and drying prior to shipment and then subsequently sales. So whilst we might have originally assumed that we could hold, for example, 10,000 tonnes at stock, I think the new normal is probably more like about 20,000 tonnes as the team ensures that the product moisture is correct for the purpose of shipment.

[Nick Herbert, Research Analyst]

Okay. And just a couple of finance queries, please. The $85 million you project as the outflow for June quarter, in terms of inflows, does -- what are you expecting in terms of further claims or those insurance proceeds for the period? And then the second one is can you just clarify, please, of the Stage 2 CapEx budget, that $231 million, what has been spent so far? And what of the $18 million, I think projected in the June quarter, how much of that relates to Stage 2 specifically?

[Brian Lynn, Chief Financial Officer]

Yes. Nick, it's Brian. Brian Lynn here. In terms of Stage 2 CapEx to-date, I'd say we've spent in the order of about probably, that $10 million of that, $10 million to $15 million of that. And in terms of the forecast for the next quarter, the $18 million, that has got about another $8 million of Stage 2 CapEx included in that balance.

[Nick Herbert, Research Analyst]

Okay. Great. And then just the -- any additional claims or insurance proceeds you guys are due to get in the June quarter?

[Brian Lynn, Chief Financial Officer]

Yes, yes. Look, it's difficult to say what that's going to be, Nick. So we're obviously working through what the costs are going to be. And we're working through that at the moment. And the way we work is that we will actually have to spend the money first and then we'll make the claim. So I wouldn't say that we've got a number in our head right now, but the expectation is that the -- any additional money that we need to spend on the rectification work should be covered by those claims.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thanks, Nick. One more comment. You asked about the customer demand. I'm sorry I didn't address that in my previous answer. I think I might have alluded to it earlier in the call. For those that are actively participated in the -- participating in the battery industry, i.e., they're producing battery-ready products or they're qualified for the lithium-ion battery supply chain, there is nothing wrong with their demand. In fact, the general commentary from the China side is demand is strong. It really just hasn't, at least not as yet, translated to price. One of the things that gives them confidence in their position in the market is that as and when you are a qualified participant for the battery industry, you're with key buyers, so Shanshan, Beijing Easpring or in the case of our customers also subsets of them for Panasonic and LG Chem and Samsung SDR. They are very confident in their position with respect to the quality of the product and the demand that they see. So in that regard, I'd say battery ready. You have no reason to be fearful of the market.

[Operator]

Your next question comes from Steuart McIntyre from Blue Ocean Equities.

[Steuart McIntyre, Senior Resource Analyst]

Listen, I just got a quick question in relation to the breakdown of the spend during the quarter, on Page 9, Section 7.4, cash balance. The first line item there is the $54.1 million for OpEx, but also costs associated with the development of construction of both Stage 1 and Stage 2. Can we just get a bit of a breakdown there? How much CapEx is effectively included in that $54.1 million?

[Brian Lynn, Chief Financial Officer]

Sure. So it's Brian here again. Look, CapEx -- further CapEx spend in there is -- would be around about $7 million or $8 million of the $54 million. But the other important thing to note is that there is obviously also within that, I guess the other operating component, if that's what you want to call it, there is an investment in inventory going on in there as well. So part of that would be related to the shipment that was delayed. But there was also, I'd say, in the order of about $8 million to $10 million of additional investment in inventory to get our inventory levels up to a level that actually allows us to sustain operations going forward.

[Steuart McIntyre, Senior Resource Analyst]

Okay. So a permanent -- a sort of an $8 million increase in working capital effectively, but it's not an $8 million you're going to recoup next quarter. It's going to be a sort of permanent inventory run.

[Brian Lynn, Chief Financial Officer]

Yes. That's correct. That's the way I look at it.

[Steuart McIntyre, Senior Resource Analyst]

Okay. Perfect. And the $54.1 million, that is exclusive of the $12 million contractual claims, so we take that $12 million off the $54 million?

[Brian Lynn, Chief Financial Officer]

That is correct. So I think the number in the cash flow is about $42 million. You back out the $12 million claim and you get to your $54 million.

[Steuart McIntyre, Senior Resource Analyst]

Perfect. Well, the only other question I had on the figures was the -- I noticed just on Table -- on Page 3, Table 2, your spodumene concentrate produced for the quarter was 52,000 tonnes, up from 47,000 tonnes. So it went up a bit. But your tantalite concentrate produced actually was down quite a lot. Now I know tantalite is only sort of 10% of revenue, give or take, so it's not super material, but it was quite a big drop in tantalite concentrate production. Can you just talk a little bit about that, please? And how should we think about that?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. It's primarily as a function of where the ore freight is coming from, Steuart. So by discrete location, you'll see quite wide variation in the tantalite credit. Our assumption is that as you continue to build out blended stocks, then that volatility should start to reduce over time. But dependent on where the ore has come from, you will see higher tantalite credits in certain locations. So for example, arising in the December quarter, tantalite credits was pretty strong, and that's because the [ monster period ], which is a reasonable contributor to the blend at that point in time, has a higher tantalite credit grade. Conversely, Stage 1 in the central pit is relatively low grade as tantalite -- that's a tantalite contribution.Now I'll say that it's relatively early in the mining cycle. We're still building out blended stocks for feed. So our expectation is that some of that volatility will come out over time. But nonetheless, in this earlier part of the commissioning and the ramp-up, that volatility exists.

[Steuart McIntyre, Senior Resource Analyst]

Sure. Sure. I mean my takeaway from that is you're obviously going to be prioritizing lithium content with respect to ore feed and the tantalum grades are going to be very much secondary. So it's probably going to be a bit volatile going forwards.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes, a bit volatile but perhaps not as volatile as it has been between the December and the March quarter. The blend, Dale alluded to it in his commentary, the ore blend is an important contributor to plant performance. So some of the key learnings coming out of the December and March quarters are how important the way the blended stocks are created on the run. We've moved to a strategy whereby we're using much larger blended stocks at the run for consistent feed as opposed to using smaller discrete stockpiles for blended feed. And the benefit that we're getting from that is we're seeing more stability emerge in the plant itself when it has a consistent feed. So those learnings are really key.Transitional ore, we probably pushed that down in the blend. We're using more fresh ore. All those things become sort of key contributors to incremental performance in terms of recovery, i.e. improving recovery, but equally, the volatility that we see in the presentation of the feed to the plant.

[Steuart McIntyre, Senior Resource Analyst]

Okay. Perfect. And look, I just thought of another question. When you guys announced this partnering process, your release actually alluded to it was -- the reason you sort of commenced the process was due to strong interest from customers, end users, a whole variety of potential buyers. Are you able to talk about that at all? How did that interest sort of present itself? Or is that something you sort of steer clear for right now because you're in the middle of this process?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Well, I can address it but only in very broad terms, Stu. So the answer is we have pretty consistently received inquiry from key participants in the lithium-ion supply chain from time to time as it relates to both offtake, how to participate in the offtake and/or ownership at a mine level. And it's that interest that has translated to the process that we've set up as we consider the mine's expansion into Stage 3.So broadly speaking, it's just affirming that we have had that interest. It's been reasonably consistent over time. And it's partly because people see Pilgangoora as an important part of the future supply chain, low-cost, long-life, high-quality spodumene products to hydroxide being key to the continued growth and the demand subset coming from principally the vehicle and energy storage industries.

[Operator]

Your next question comes from Larry Hill from Canaccord Genuity.

[Larry Hill, Analyst]

Looks like the quarter has been a good one so far. Just to get back on to Stage 2, if I can. Is the commentary still the same around the time line of that as being predicated on when Stage 3 sort of a decision is made on that? Basically, you deferred Stage 2 6 months because that would allow you to run that Stage 3 process. So is the Stage 2 ramp-up still predicated on when Stage 3 is finalized or a decision on what that sort of sell-down or transaction occurs maybe midway through the year or in the next 3 to 6 months?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Thanks, Larry. The decision with respect to the progress of Stage 2 is predicated on really 2 key factors; one being the progress of our customer base and how they envisage the expansion of chemical conversion capacity unfolding. So to recount sort of briefly here, both POSCO and Ganfeng, we obviously keep close to them because they are 2 key customers to growth in Stage 2. And both weren't quite ready in the period of time that we could have been ready with respect to Stage 2 expanded capacity. So we don't want to get ahead of our customer base. It's more a case of matching our Stage 2 expansion to the upcoming expanded chemical conversion capacity of our customers or in fact ourselves where our investment aligns with POSCO's. So that's one key consideration.As a result of that, that had given us time to consider the funding method as it relates to both Stage 2 and Stage 3, and hence, the time to run the partnering process that we've referred to. It's really those 2 key considerations that shape our views around the delivery of Stage 2.To address your question more specifically, would we execute Stage 2 with or without the partnering process? Well, again, that's still open to debate depending on the partnering process and its progress over time. If it turned out that the partnering process was going to continue to extend and our customers were still wanting products in the second half of 2020, then it's conceivable that we would execute in a way not that dissimilar to which was originally envisaged. But those decisions are yet to be made.

[Larry Hill, Analyst]

Yes. Great. And I suppose I can still look at that as an option given that you've enlarged or increased the bond facility, that's still the Great Wall money to flow through, which was the other component. Can I just get an update on when that's expected, the Great Wall component?

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. The Great Wall component, those documents are executed. Their money flows upon the completion of the balance of the project financing. So once the rest of the Stage 2 project financing is in place, then we can draw down on the Great Wall prepayment facility. But to be clear, those documents are executed and that money would be ready to be drawn down once the rest of the financing is closed.

[Operator]

Your next question comes from Warren Edney from Baillieu Holst.

[Warren Edney, Equity Research Analyst]

I've got 2 questions. One, could you just talk about how the grade reconciliation and what sort of things are going in terms of mining? And also how the operating costs are tracking relative to original budgets? Obviously, you've got to adjust for changes in recovery, but is there anything you're seeing that needs to -- we need to address in terms of what Stage 1 forecast costs were?

[Kenneth Edward Brinsden, MD, CEO & Director]

Thanks, Warren. Yes, good question. With respect to grade reconciliation, that's generally been very strong as it relates to reserve. One area where we've seen more reclassification is probably the best way to describe it is that it relates to the combination of transitional ore and the ore that's at surface where you end up with more disruption and more dilution through unconstrained blasting. So our original expectation was that, that material or a portion of that material would be available for feed, but we've had to reclassify that as longer-term stockpiles or mineralized waste to be treated over the remaining life of mine.Now the reclassification relates to the proportion of the feed that makes it into the current blend. So that proportion has reduced. So they'll evolve to assume, so roughly originally the plan being 15% of that ore feed makes it through to the current blend. The answer is today, it's probably about 5%. So not a really material impact, but nonetheless, less than we'd originally assumed. It does not affect the overall reserve. It's really just to do with this initial mining over the first 12 months, whilst we're exposing more ore faces. Does that address the reconciliation question?

[Warren Edney, Equity Research Analyst]

Yes. It does. I just wondered, because you did mention in the commentary about the transitional ore and whether that was going to change the sort of grade profile over the next couple years as you saw it originally. That's all.

[Kenneth Edward Brinsden, MD, CEO & Director]

No. Just more that we probably had to do a bit more mining to get to more fresh ore so that we can increase the fresh ore in the blend. That's probably the impact over this first year or 2 of mining. But as it relates to the entire reserve, no impact or very, very small.Yes. So on the question of operating costs, we haven't really seen anything that we had thought would represent a major impact over time other than the one that Brian addressed, which relates to the working capital position. We've definitely built up more working capital through the system than was originally envisaged, but we don't expect that to ultimately impact the overall operating costs. And the stock we built up in the system more as a function of achieving all the other aims that the company is seeking to achieve, so maintaining a high-quality product, ensuring that the moisture in the ore is right before it's loaded on a ship, the blending required to achieve the product grade. All of that has resulted in more stocks than we had originally assumed. But once those stocks are built, then there's no material impact to the underlying cost base.

[Warren Edney, Equity Research Analyst]

Yes. No, I was sort of more thinking about how you see the processing costs coming out after doing all this additional work to improve recoveries and also how you're going with the mining costs and whether there's been any significant inflation in costs.

[Kenneth Edward Brinsden, MD, CEO & Director]

Well, we're definitely carrying more costs in the current environment as we ramp up the plant's capacity, and that manifests itself in things like maintenance, labor, the frequency of shutdowns. Yes, that's -- more cranes, that type of thing whilst we're going through this ramp-up process. So ultimately, we don't expect those costs to be baked in. Is there anything else that you want to add there, Dale?

[Dale Henderson, Chief Operating Officer]

No, no.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. So Warren, 2019 as a whole is really a year of consolidation. But by the time we get to the third and fourth quarters of this calendar year, we'd say you should be seeing some good performance on the cost base at Pilgangoora. There's nothing that's overly scared us in what we've seen so far.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Brinsden for closing remarks. Pardon me. We do have one more question from John Deniz from Paragon Funds Management.

[John Deniz, Chief Investment Officer]

At a glance, looking at what you've released today, Stage 1, sorry I missed the first part of the call. So just to recap what I've seen, stage 1 still not as big, and as far as I can see, it's not free cash flowing. Burning through what you've got, Stage 2 is still unfunded. Be nice to see a sources of new [indiscernible], but it looks to me that it's unfunded.And then you talk of minority sell-down Stage 3, if you do give up offtake on Stage 3. I mean what's actually left to sell in this minority sell-down? And I suppose, give me a better sense of why you're confident that you'll get an outcome here and one that will be one that will make sense for the company.

[Kenneth Edward Brinsden, MD, CEO & Director]

Yes. Thanks for your question, John. So with respect to Stage 1, to be clear, the product quality has always been very strong. So we would typically ship the genuine 6% product. If we say it's SC6, it's genuinely SC6. Everything that's been loaded on a vessel so far would translate to either 6% or higher, except for the 1 vessel that we've identified in the most recent quarterly, which we use as an opportunity to sell the initial off-spec products from the first phases of commissioning.As it relates to recovery, we did address this pretty extensively on the call, John, but we're -- whilst it was a frustrating quarter in March because we felt like we'd taken at least a small step backward in recovery, we have reason to believe that there is still going to be improved performance, and April is a good example where we've seen strong periods of recoveries, 65%. We've guided actually materially higher than that. So continued optimization will occur. And as per Dale's commentary, we'd expect to get to 75% recovery by the end of the year.In relation to Stage 2, well, Stage 2 could be linked to Stage 3 as part of the minority sell-down. But if it wasn't, we would continue with basically the original model in Stage 2 funding, a combination of customer financing as it relates to Stage 2. The money that's been received from Ganfeng in equity, the prepayment, that's now signed off with respect to Great Wall, and then originally, as anticipated, the bond tap issue underwrites the $231 million for the Stage 2 expenditure.But to your point about Stage 3, in the event that we're able to realize the potential that we think is in the mine, and for that matter, link that to the interest that's been expressed in the combination of offtake and ownership at a mine level, then we could very well link the cost of Stage 2 and Stage 3 expansions with a deal like that. We remain confident, John, because there is big moves being made downstream in the lithium-ion supply chain. And it may not be immediately obvious equity markets, but if you're a participant in the lithium-ion supply chain, it's pretty amazing how quickly the whole supply chain is moving to vertically integrate supply. And we think with Pilgangoora being a long-life, high-grade mine, we've got a good opportunity to be a key player in that market positioning, in that vertical integration to link our expanded mine capacity to future chemical capacity. That's really in a nutshell, John.

[Operator]

Thank you. There are no further questions. I'll now hand back to Mr. Brinsden.

[Kenneth Edward Brinsden, MD, CEO & Director]

Thank you, everyone, for your participation on the call and special thanks to those that have participated via the webcast. And as Nicholas alluded to earlier in the call, if there's any additional questions, please send them through via our admin email. Thank you very much for your time, and we look forward to engaging again soon. Thank you, ladies and gentlemen. Bye-bye.