Pilbara Minerals Ltd

ASX:PLS

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to the Pilbara Minerals March 2022 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 Brinsden, executive]

Thank you, Gaylene, and thanks to everyone joining on the Chorus line, and a special thank you to shareholders that might be participating on the web host. Welcome to everybody. I'm joined in the Pilbara Minerals boardroom by Dale Henderson, Chief Operating Officer; Brian Lynn, Chief Financial Officer; David Hann, Investor Relations Specialist; and Alex Eastwood, Chief Commercial Officer. We're all very happy to be with you this morning and give you a further update on site activities and events arising and post the March quarter. Thanks for joining.

Well, I guess the backdrop for the March quarter is the same or very similar to the December quarter: accelerating price, strong demand. And I'm sure that if we could produce more spodumene, we would easily be selling more spodumene for a very healthy price. And the acceleration in price, in essence, continued from the December quarter into the March quarter and now flowing through to the June quarter. And the most recent piece of evidence to indicate just how strong the demand conditions are is the fact that Pilbara Minerals held another BMX sales trading platform auction close of business yesterday and settled on another record price as it relates to spodumene in the market. The equivalent price for a 6% spodumene tonne landed in China was approximately USD 6,250 a tonne.

So it represents another high-water mark as it relates to pricing in the market and further clear evidence as to how short the market is. And I'm pleased to say that Pilbara Minerals is very, very well placed to participate in this strong price environment as a function of, well, obviously, what we're achieving via the BMX sales platform but also more generally as a result of the growth that's going on in production and especially our expectation is during the June quarter.

So yes, the conditions are very, very strong. As it relates to the work underway, Dale is going to give you a much more detailed rundown with respect to mining and processing activity, the work that's been underway on the Ngungaju Plant. But again, more broadly, there are some challenges. And I'm sure they're no different to the experience of just about every mining company, well, not even just in Western Australia but Australia-wide.

The effects of COVID are being felt, and that's our experience. Previously, it was the effect of the border closure constraining the pool of available labor. I would like to think that some of that has been relieved as a function of the borders being opened. However, now we're experiencing the direct impact of COVID transmission in the community that results in the combination of either illness and inability to present to work and/or the effect of isolation. So that has been another source of frustration.

I think, broadly, you would say that the net effect of what we've experienced with respect to COVID and the delays in some of those people issues means that in reality, we are about 2 to 3 months behind in production where we would like to be. Nonetheless, still confident in the capacity of the various plants and the ramp-up that occurs between now and the end of September. So as a result, we continue to target the 580,000 spodumene concentrate run rate, and we expect that to arise during the September quarter. It's also fair to say that the June quarter is an important step along that path, in which case we will see higher production and sales during the June quarter as compared to the March quarter.

As a result, I think it's also fair to say the costs are a bit higher than we would like and/or expect. Basically, the big picture story there is that we are carrying costs as it relates to the additional tonnes. But as yet, we haven't delivered the additional tonnes, albeit that's coming. So that results in a slightly higher cost result for the March quarter.

Elsewhere in the business, post the quarter end, we've completed the formation of the POSCO downstream joint venture. And POSCO themselves are now deep into the delivery aspects around the large-scale hydroxide plant that's been built in Gwangyang in South Korea. We're really pleased to be working with POSCO in that endeavor. It's an important part of the future growth inside Pilbara Minerals, our ability to sell spodumene into South Korea and also to pick up that economic participation in the downstream facilities alongside a partner like POSCO. It's a fantastic outcome for the company and a very important part of our future growth.

In a similar vein, we continue to progress the Mid-Stream Project and to work with Calix on the proposed joint venture for the Mid-Stream Project. And we're also really pleased with the results there. The Mid-Stream Project is also going to be an important part of Pilbara Minerals' future as we value add product at Pilgangoora and change the current spodumene supply chain, at least in part with the expectation that we're going to be able to access markets beyond China with that Mid-Stream product, but in particular, targeting the European market in the first instance and likely North America over time.

They are all important initiatives that relate to the mid-term and longer-term growth of Pilbara Minerals, and in my view, represent the next leg of -- leg up in growth for the company by value adding product and creating different jurisdictions through participation with those value-added products. So they're all important steps for the future growth of the company.

That's it for introductory comments. I'll come back and talk about the market in a bit more detail and the BMX auction. But in the intervening period, I'm going to hand to Dale, who will talk about ops and projects. And then after Dale, Brian will backfill a bit more of the cost detail and financing detail. So over to you, Dale. Thank you.

[Dale Henderson, executive]

Thanks, Ken, and good morning, everyone. So I'll speak to, as Ken mentioned, update on ops, then projects and lastly, touch on -- a little bit in exploration.

So starting with ops, the general comments, as Ken's kind of covered this. Absolutely, it's been a quarter where we've had COVID headwinds, and that's played through to an operational impact really in the form of some pressures around personnel resource levels. And generally, that's been at different points in time being felt in every corner of the operation. Now appreciate we're not alone with this challenge, and we were anticipating some effects, and we certainly felt that during the March quarter. And as I say, of course, that's played through to an operational impact.

Yes, we've met guidance, but yes, it's not been without some challenges there. So I just want to acknowledge the huge effort across our team and our contracting partners who had to contend with what's been a very dynamic environment with reacting to, unfortunately, challenges in this space. And by way of a little anecdote, we had a charter applied for a shutdown, which got canceled at the last minute due to pilots being taken out of account with COVID. So that sort of knocked out 70-plus people at the last minute for shutdown.

So that in itself is not really a material issue, but in aggregate, these types of sort of incidence have obviously flowed through to an operational impact. So looking forward to moving through this period, and it is certainly well underway within the WA state now. So looking forward to getting on the other side of it, and everyone else is.

So moving from those sort of general comments around the macro picture and stepping into the vital signs of the operation. From a safety perspective, a step forward in safety with the 20% drop in TRIFR, down to 3.5. Well, we did have one hand injury for the quarter. So not without one incident, so disappointing on that, but at least the trend is heading down.

From a production standpoint, 81,000 tonnes for the quarter, meeting guidance. Not shooting the lights out, but as I say, meeting guidance against those COVID headwinds. From a cost perspective, on a unit cost basis, principally due to the lower production volumes, we had some extended shutdowns and run time challenges there in conjunction with some suboptimal ore feed, which was a function of needing to change ore sources fairly frequently, which plays through the recovery impact. And Brian will offer a few more details around the cost performance, and we'll hand over to him shortly. So those are the vital signs of the operation.

Offering a little bit more detail around the activities within the operations for the quarter. Mining was about a continued step-up and outright mine movement. So a 30% increase from last quarter to 6.1 million metric tons. Despite that big step-up, we wanted to be doing a bit higher than that. So we were a little bit under. But again, really a function of the many challenges across that part of the business.

In the mining space, March quarter, we ramped up our owner-operated fleet in conjunction with MACA, our mining contractor. The owner-operated fleet there is principally focused around serving the Ngungaju operation of the South pit. Meanwhile we'll keep MACA focused on the Central pit. So those 2 operations combined have played through to that big step-up. So a big increase in manpower and ramp-up across both of those teams and all going well. So a shout-out to SMS and Murchison drill and blast and goldfield services, who have been working with us on the owner-operated fleet. It certainly hit the ground running, and it's been a safe and very successful start to date. So thank you to you guys.

So within the mining category, the focus remains working very closely with those contracting partners. We want to continue to increase these high rates of volume movement as we move forward. And of course, that's all about setting us up for the expansion cases, which I'll update on in a second.

So moving from mining and then stepping into the process plant area, starting with Pilgan. Recoveries were broadly in line with what we were targeting, 61% versus 64%. Of course, a lot lower than historically what we've had in the past. But we knew this going into that as a function essentially around the chopping and changing of ore feed that we were anticipating for that particular quarter. That plus the outages plus a period of training new operators all played to a more modest recovery target for that quarter.

But as we look forward, we'll definitely be stepping that up through the June quarter as we move into what we think should be a more stable period in terms of ore feed, operator stability and, all going well, less impact from COVID, touch would. So that's on the Pilgan Plant here.

Now to Ngungaju. Reminder about the Ngungaju operation, this was always about a staged recommencement of that operation. So a Stage 1 being bringing the core circuit online and then a Stage 2 around bringing the float circuit online. And just to remind everyone, the investment proposition to Ngungaju for Pilbara was always about giving that operation a significant birthday in terms of investment in that plant, bringing it back up to spec plus also deploying a bunch of operational improvements with the aim of achieving higher operating performance from that asset in terms of run time and recoveries.

So where we're at is coarse circuit. We kicked that back into life in October last year. I'm pleased to report during the March quarter, that part of the circuit has been running well. It's really hitting its straps now, and that equals basically approximately 40% of the expected run rate from that operation. Meanwhile, during the March quarter, the flotation circuit being the other part of the circuit, the team was busy completing the construction works, which were not insignificant, sort in the form of new flotation additions. So new tanks, pumps, complete birthdays through all the flotation circuits, new rotors and stators, rubber lining, you name it. Quite a significant piece of work executed, and our construction completed in the March quarter.

And during the March call, we started the no-load commissioning, which is the commissioning of the circuit without ore feed. So where we're at today and the month we are, we are deeply in the throes of actually introducing that ore. And from this point forward, it will be about ramping up that float circuit with a view to be exiting the quarter at a much more healthy run rate across both the combined course and float circuit. And as Ken mentioned, it's during that September quarter that we want to be getting up to nameplate and really hitting our straps across the combined course and float circuit.

So a bit of detail there on Ngungaju, but just wanted to remind everyone about the journey there and how we're traveling. And yes, of course, we're looking forward to those extra tonnes coming out the back and getting those on to the exchange, all going well. So that completes the sort of ops kind of category there.

Now stepping into the projects land. Really, really good area for the project team and getting more busy as we look to get it up and capitalize on this incredible pricing environment. On the project space, starting with the improvement projects. To remind everyone, that was a debottlenecking package for the Pilgan Plant for another 10% to 15% uplift. That's all done and dusted, ramped up and built into the plant, and that's A-OK. So checking the box there.

The next piece of the incremental expansion relates to what we call the P680 project. That's another 100,000-tonne increase to bring us up to 680,000 tonnes aggregate production run rate. Where we're at with that, the team are busy finalizing the docs to support the FID decision, which we're looking to get that squared up this quarter. So looking forward to announcing that in the coming weeks, all going well, obviously, subject to Board approval.

Beyond the P680, of course, is the P1000. So a separate stream of activity, getting busy. Well, we are well and truly busy on that, working towards an FID for the back of the calendar year, December quarter. And that will, of course, as the name suggests, P1000, bring us up to 1,000 tonnes in aggregate out of the gate from the Pilgangoora operation.

Other projects in the projects category, solar farm that we awarded some time back to Contract Power. They hit the ground during the quarter, and they are underway to get on with the construction for that. So good to have those guys out there and underway on that package.

Life Cycle Assessment was completed. Another key package of work as part of our obligations for the Clean Energy Finance Corporation. So that's all gone well. And thank you to Minviro, who's a specialist in this area who has helped us out with that package of work. Looking forward to releasing some of that information as part of the annual report coming up.

Lastly, in the projects category, the Mid-Stream Project that Ken touched on. Scoping study was finalized. We like what we see, and it all supports moving forward. So we're looking forward to progressing that with Calix. And we're busy working with them. And as Ken mentioned, we see this as a key proposition for the future of Pilbara Minerals as we look to value add and create more value for our shareholders moving through the downstream.

So that completes the sort of projects category. And lastly to finish, a couple of quick ones on the exploration category. John Holmes, our exploration manager, has been able to drill rig again, doing some sterilization drilling. And he's going and found more ore. So it's another great intercept, which, long story short, is just more evidence which underscores just this incredible system that we have at Pilgangoora. The more we drill, the more we find, and we have the good problem of thinking through how we develop all of those. So if we give him half a chance, we'll be drilling more holes shortly for John. So well done, John. Thank you for the new ore.

And lastly, Mt York, a couple of gold intercepts. Of course, we're not a gold company, but we like to find value and create value for our shareholders. So we're looking forward to seeing how we progress that piece.

So that's a wrap across the ops, projects and exploration. And at this point, I'll hand over to Brian, our CFO.

[Brian Lynn, executive]

Great. Thanks, Dale, and good morning, everyone. So I'm just going to just give some key highlights from a financial perspective on the quarterly results.

So in summary, I'd say we're obviously operating in a very positive price environment, and that led to a strong operating margin being generated. That strong operating margin then flowed through into an improved cash position at the end of the quarter. But as I think Dale mentioned, we have been constrained operationally. There's clearly been some issues around manpower shortages, and that has had an impact on our production levels, and that flows through to ultimately having an impact on our unit cost. So the unit costs for the quarter were up compared to both guidance and compared to the previous quarter.

With respect to price and operating margins, the price, there was a significant increase. So we generated -- or we managed to achieve an average price of USD 2,650 on an SC6 basis for the quarter, and that compared to a price of USD 1,750 that we achieved for the December quarter. So a significant increase during the quarter. That ultimately meant that we generated an operating margin for the tonnes from the Pilgan Plant on USD 1,800 per tonne. So that's a fairly significant margin on the 50-odd thousand tonnes that we sold from the Pilgan Plant.

That strong operating margin led to a strong cash margin being generated. So the cash generation from the Pilgan operation was just shy of, in Australian dollar terms, $115 million for the quarter. And interestingly, that compared to about a similar number for the December quarter, but we actually sold about 25,000 tonnes or less this quarter compared to the previous quarter. So clearly, that higher price has a significant impact on the margin our operations has generated.

Cash position at the end of the quarter, including the irrevocable letters of credit that we count towards cash, was $285 million. So that's about a $40 million increase from the $245 million at the end of December.

Just running through the major movements in the cash balance. So as I mentioned, we had about $115 million of margin being generated from the Pilgan operation on lower tonnes. And we also generated -- even though Ngungaju is still in the commissioning and ramp-up phase, it was able to generate an operating margin of about $7 million. So clearly, the high price is allowing that operation even during ramp-up and commissioning to cover its costs and make additional money as well.

The result of the positive pricing environment has meant that we had to repay some debt back. There's a cash sweep mechanism within the syndicated facility agreement that we have. And the result of that is that we paid back $25 million of debt during the quarter. We spent about $30 million, $38 million on capital. So that's a combination of the work we did on improving the Pilgan Plant, the restart of the Ngungaju operation as well as the waste movement that's required to open up the various bodies ore to allow us to provide the correct blend of ore to the plants.

Interest costs, about $3 million. Corporate administration costs, about $4 million.

It's probably worth also just noting that we noted in the call that we just missed out on a shipment of about 20,000 tonnes. That was meant to have gone out in March, and it was planned to go out in March. But due to poor constraints, that actually ultimately sailed on the 7th of April. So that ship had actually -- if we had managed to get that out by the end of the March, that would have actually added about another 67 -- in Australian dollar terms, about $57 million to both the cash balance as well as the operating margin. So the operating margin, you would have been at about $180 million for the quarter, if that had sailed by 31 March. Clearly, we will get the best of that when we talk about the June quarter.

Well, just turning to the unit operating costs for the quarter. So it's been -- the challenges that we're experiencing at the operations in December continued certainly for the first half of the March quarter. And in fact, they were probably compounded just because of the fact that we had a sort of major impact as a result of these manpower shortages.

So those -- as Dale mentioned, we had some significant challenges around COVID transmissions as well as that the mining industry in WA is now experiencing some fairly tight labor markets as well. So all in all, the managed shortages we had really had a significant impact on core operations.

Now the result of that is that if you don't have all the right people in place, you have reduced ore tonnes. You have less optimal ore being fed into the plant. Your plant shutdowns are extended, and sometimes, they've actually ended up being unplanned because you can't get into a battle rhythm of making sure the maintenance program is working properly, and you end up with lower lithia recovery.

The sum of all of that is that -- the result is that you end up putting in the same number of ore feed into the plant for the same cost, but you get less lithia coming out the other end. And that ultimately leads to a higher unit cost. So the unit cost -- and this is for the Pilgan operation. In Australian dollar terms, FOB before royalties was $632 a tonne. So that's about $55 higher than the December quarter of AUD 577 a tonne and also ahead of our guidance, which was around about $490 a tonne.

The increase from the December quarter, that is largely just driven by the fact that we just didn't generate the same number of spodumene concentrate tonnes. So we're probably thinking about 12% lower in terms of concentrate tonnes. And interestingly, the unit costs went up by a similar number. So it's all relative to the concentrate tonnes that were ultimately generated.

A couple of other cost increases, which came through during the quarter. Obviously, I think everyone is aware that fuel has obviously been significantly higher than it was in the back half of last year. So fuel probably has added another AUD 16 per tonne. Tantalum also, we didn't quite get as many tantalum byproduct credits this quarter largely as a result of mining more ore out of the South pit, which doesn't have as much tantalum in it. So that would account for about $7 per tonne.

And we also introduced a bonus during the quarter. This bonus was introduced to try and help us attract and retain more people. So I think it was actually a reaction, if you like, to the labor market that we find ourselves in. And that bonus, which I think is a good idea and has actually helped stabilize the workforce towards the back end of the March quarter, added about $7 a tonne to the cost.

If we add on royalties and freight in Australian dollar terms, we ended up at about $949 a tonne, which compares to $805 a tonne for the December quarter. Main increases being about AUD 12 as a result of freight increases. So freight costs during the quarter averaged about USD 70 a tonne, and the prior quarter was about, I think, $60 a tonne. So the freight market is still very, very tight. And those costs continue to increase. And then clearly, our royalty costs, which is just a function of the price that we sell the product for, has gone up in line with the higher selling price that we received.

So clearly, costs were disappointing for the March quarter. But we are confident that production levels will improve during the June quarter. We feel like we have made some inroads into improving our workforce numbers and making sure that we've got a consistent workforce as well. And this should lead to us providing better quality ore to the plant, just having a better maintenance strategy. And this in turn should result in improved production levels, therefore more spodumene concentrate and therefore a better unit cost outcome compared to the March quarter. So that's for the June quarter. And so as a result, we're now -- we've guided to unit cost for the June quarter, FOB excluding royalty, in the range of AUD 490 to AUD 530 a tonne.

One final matter of note is just a point around the cash sweep mechanism. So I mentioned that during the quarter, we paid back, in Australian dollar terms, about $25 million of debt as a result of this cash sweep mechanism. Now we've been in discussions with our lenders during the quarter. You can't evidence to everyone that in this pricing environment, if we continue to allow that cash sweep mechanism to work the way it was designed, the debt would probably be repaid by about August of this year.

So that clearly is not an outcome the lenders wanted and not an outcome the company wanted. So we have worked with our lenders, and they have, just in the last day, actually confirmed that they will agree to a waiver of that cash sweep mechanism for the remainder of this calendar year.

And I think that's very important for us. Obviously, it allows us then to direct the cash flow being generated both to our operations, but also we will be able to also direct it to any of the expansion programs that Dale referred to as well. So I think that's very important for us, and we're very pleased our lenders has worked with us to achieve that result.

So I think that's everything I wanted to go through. So I might hand back to Ken.

[Kenneth Brinsden, executive]

Okay. Thanks, Brian. Thanks, Dale. I'm going to touch base on the nature of the market, a little bit more color around the BMX platform and a quick reference to the structure in the market and how conditions today are clearly different to historical norms.

The BMX platform, I've alluded to the fact that we finished another auction yesterday and achieved another record price. The BMX platform has turned out to be, I think, quite an important innovation for the industry. And Pilbara Minerals is genuinely leading the charge in this regard mainly because we're very pleased with the level of participation in the platform itself. We've had now about 50 inquiries with respect to participation. We've screened over 30 participants for access to the platform. And each time we run an auction, we're receiving bids from many, many counterparties. And the bid in itself is aggressive.

The other point I'd make is that quite often, we're asked, okay, but who is actually bidding? For example, is it traders? Well, I can tell you that almost universally, participation and active bidding is represented by end users. So again, it clearly shows that there is a key issue in the market in the sense that there is not enough lithium raw material supply because it's the end users that are bidding up the price, not traders. So I think that's an important distinction to draw and, in fact, demonstrates how successful, in fact, the BMX platform is and hopefully can be over time as we continue to grow production from Pilgangoora and start to place more product on the platform.

The other point I'd make is just about absolute price received. Pilbara Minerals is a lead up in respect of price received against spodumene concentrate sales and has been for quite some time. Part of that is motivated by tools like the BMX platform, but the other part of it is the combination of contractual arrangements around offtake and the relationships with our customers. The net effect of all that is Pilbara Minerals clearly outperforms its peers in respect of price received quarter-on-quarter.

And yes, I'm really pleased with the work that the team has done to get us into that position. And honestly, I think it all bodes well for the future. Well, one of the conditions today, we haven't been definitive about our expectations around price received during the June quarter. But broadly speaking, there is going to be another material step-up in price received. We've alluded to the fact that the SC6 price referenced to the March quarter was $2,650-odd a tonne. That is easily going to be $4,000 a tonne plus in the June quarter because of the effect of the chemicals price movement quarter-on-quarter.

Now as to what we achieved with the BMX platform, well, we've also been clear about that. Obviously, it's materially higher. So that's another important distinction to draw. When people reference pricing, it's now also important, I think, to be clear about what's being referenced. Is it a contractual price for longer-dated offtake arrangements? Or is it something that's representative more of spot market conditions? That is an important distinction to draw because the 2 prices now are reasonably materially different.

The last point to make in this area is about the structure of the market. And again, I think this is potentially something that's been missed as people think about the future of the industry. Historical norms are being broken down, and the net effect of what's happening is, and I think clearly demonstrated by our BMX sales, is that the miners are going to win more of the margin into the future because it's likely that there will continue to be lithium raw material supply shortages.

In effect, margin that might have been available downstream is going to be passed upstream. So that's point 1 that I would make about price. Now what I think that means is that I don't know what -- I don't have a crystal ball. I don't know what the price is going to be, but I can assure you it is going to be materially higher than historical norms.

The second point I'd make is about the structure of the cost base in the market. And again, this is not -- perhaps not well understood. When you think about how much new lithium raw material supply has to come to market, it is going to build out the right-hand side of the cost curve. I have no doubt about that. The combination of novel lithium sources and projects that are either lesser grade or in more difficult jurisdictions subject to transport limitations, all those things mean that the cost curve is going to be built out on the right-hand side. And what that means is you should not rely on historical norms when you think about future price.

So out of all that, in the end, I think Pilbara Minerals is incredibly well placed because we've got flexibility with respect to our sales platforms and/or participation in the market. We've got a project that's very, very large in scale and in the right jurisdiction and the right proximity to keep ores. So out of all those things, Pilbara Minerals is -- for all of the analysts in the room, Pilgangoora is the [indiscernible] of the lithium industry. How about that?

All right. I think that's enough. And I'm sure there's going to be some fantastic questions. So in summary, it is a challenging quarter. The March quarter, I think, represents another difficult kind of period for the company as we bring on the 2 facilities, continue to ramp up capacity and especially in light of the impacts of COVID-19 and a more recent community transmission. That's been difficult.

Again, perhaps the irony of all that is that our experience is no different to just about everybody else's. And reversely, it probably supports price. So I think out of all that, we can simply say we're headed in the right direction. We're a little bit behind where we would like to be, but nonetheless, still able to participate fully in the market because of the key pricing outcomes that we're achieving.

All right. Gaylene, I'll take it back to you, and we'll take some questions from the Chorus line. And I encourage those on the webcast to submit their questions, and we'll get to them shortly. Thank you. Gaylene?

[Operator]

[Operator Instructions] Your first question comes from Hayden Bairstow with Macquarie.

[Hayden Bairstow, analyst]

Just a couple from me. Just firstly, on the longer term, Ken. Just interested to understand how quickly you think you could accelerate. I mean you sort of talk about the next 100,000 tonnes of spodumene. But what is the scope to target that ultimate sort of 1 million tonnes a year, the ultimate potential areas of east of Pilgan. Just given where the market is now, the speed of EVs and everything, can you really accelerate that base expansion plan?

[Kenneth Brinsden, executive]

Yes. It's not as easy as it might sound. But nonetheless, we're working at that as hard and as fast as we can. So I'll get Dale to jump on and just explain a little bit more detail about how we see those projects unfolding.

[Dale Henderson, executive]

Yes. Thanks, Hayden. Yes, as it relates to growing production base, absolutely, we're trying to do as rapidly as we can. As to how long, this is the very question we've been grappling with, with the team because what we're observing is there is pressure around long leads and supply chain challenges, everything heading to the right. So historically, as it relates to that 100,000 tonnes, we've had a target of sort of 9 months from FID. However, depending how we go with finalization of long lead times, that might be more like 12 months. We'll see how we go. But of course, we'll be doing everything we can to bring that to the left. So that relates to that P680 project.

The P1000, again, is in the sort of category of evaluating the long leads to see what we can do. And yes, as you can probably appreciate, it's got the same pressures. So we're looking at anywhere around sort of the 18-month mark from FID. But I'd like to say that that's going to be something to the left of that. But at this point, yes, not able to confirm that.

[Hayden Bairstow, analyst]

And then just on the overall product, I mean, can you give us an idea of just what the average grade is at the moment? I just want to compare that to where recoveries are. And then how much work have you done with customers on dropping the average grade to improve recoveries over time just given -- we're seeing that from some of the other producers out there materially dropping grades really on product quality.

[Kenneth Brinsden, executive]

Yes. That's the current question, Hayden. Yes. So we've alluded to that in the quarterly. Basically, up to this time, we continue to target the SC6 product suite. That's been -- and what -- and the net effect of that is that you're typically shipping a product between about, let's say, 5.7% and 6.1% or something like that. You wouldn't be in that range. However, in the last 3 to 4 months, we've continued to test with customers the ability to ship at a lower grade and, in particular, targeting something that's more akin to an SC5.5 product.

You can see that as it relates to our BMX sales, where, in fact, each of those has targeted basically SC5.5 as compared to SC6. And our customers on the face of it are demonstrating some flexibility because, as you've alluded to, they really want the lithia units. And if it translates to more lithia units, they are prepared to accept a lower grade.

So in summary, what does that mean? I think a highly likely trend as it relates to Pilbara Minerals but arguably for the industry more broadly is that the trend is from SC6 to SC5.5. And we might even yet look at special cases where it's SC5. And the logic in doing that is that's still price competitive. But ultimately, it should deliver a step-up in site base recovery and more lithia units to customers.

[Hayden Bairstow, analyst]

Okay. And then on recovery rates, is that still -- if you went to those grades, is 70 to 75 still the range? Or could it be better than that?

[Kenneth Brinsden, executive]

No, it should be better than that. Yes, yes.

[Operator]

[Operator Instructions] Our next question is from Alexander Papaioanou from Citi.

[Alexander Papaioanou, analyst]

Two questions. There are some news that EV manufacturing in China need to shut down due to COVID restrictions. Have you seen any impact on feedstock pricing? And for the Ngungaju Plant restart and ramp-up, are you comfortable with the run rate at the end of this [ CY ]?

[Kenneth Brinsden, executive]

Yes. Alex, both good questions. With respect to China and the impact of car plants being shut down, we have not seen any impact in demand. In fact, demand has been consistent now with respect to our ability to sell for the best part of 12 months, and we haven't seen any change. Now there's been a little bit of softness in pricing, but in part, that doesn't surprise me because the market had obviously run very, very hard and fast in the period prior. The fact that it's taking a breather really is no surprise.

What happens from here? Well, there is some uncertainty. That's why it's a good question, Alex. We don't know how the COVID situation might yet play out in China. But my sense is the market is so short in respect of carbonate and/or hydroxide, especially domestically in China, to indicate that they will take all the product that they can, and in which case, we should not see any particular impact as it relates to demand. Should you keep an eye on it? Absolutely. Do we expect it to impact demand in the short and the medium term? Not really because the market is critically short.

On the question of Ngungaju, well, really, at Ngungaju, the outstanding item now is the ramp-up of the flotation circuit. We've modified the circuit. It's quite an extensive project that Dale alluded to there. So the replicates largely replicate the Pilgan Plant in respect of flotation technique. That's quite a big job. But nonetheless, we understand the flotation process pretty well. That's a function of what we've done at Pilgan historically.

So therefore, we remain confident about ramping up the flotation circuit at Ngungaju and ultimately hitting the overall Pilgangoora production run rate of 580,000 tonnes per annum by the September quarter. So that's basically current as to the ops targets, and in which case, from the latter part of the September quarter, we should be running at 580,000 tonnes per annum.

[Operator]

Your next question is from Timothy Hoff with Canaccord.

[Timothy Hoff, analyst]

I was just wondering if you had any commentary for us on the current inventory levels inside China. I mean the pricing implies that there's not a lot of around, but is there any additional info you can give us around that?

[Kenneth Brinsden, executive]

Yes. Tim, there was a bit of commentary about some inventory being released from the brine operations in the west of China. That commentary sort of arose at the back end of the summer season there to try and help with price relief in the market. But as I understand it, not particularly large volumes.

I think you're right. The price indicates that the inventory levels across the board are very small. I'd go one step further than that, Tim, and say there is already customers that are contractually bound for the delivery of chemicals in China that don't have raw materials. So yes, I mean that tells you that the whole market -- it's not even really price dependent. There is just no product. So I think the situation is pretty acute there and indicative of what's yet to come in the industry. It's a big problem.

[Timothy Hoff, analyst]

And then could you give us an update on the executive search and how that's going, finding the next Ken.

[Kenneth Brinsden, executive]

Yes. Tim, good question. Sorry, I should have addressed that in my commentary. Yes. Well, the process is obviously ongoing. The latest advice from Tony, our Chairman, is that the company has been through the process of shortlisting. And that basically represents the current status, in which case we're on target to make it clear to the market as to the new CEO over approximately the next 2 to 3 months would be my suggestion.

[Timothy Hoff, analyst]

Fantastic. And then just on the Mid-Stream product, I think sort of -- I guess that came out mid-quarter, and we didn't get too much of return around it. But just to confirm that what you're looking to produce can actually go straight into an LFP cathode.

[Kenneth Brinsden, executive]

Yes. Well, the first of the results that we're targeting there is lithium phosphate. So yes, there's a natural kind of propensity to say, okay, that might yet become feedstock for LFP cathode materials. It's not yet completely clear, Tim, but that can be the case, at least not directly. Indirectly, yes. I think that is absolutely true. The idea that the combination of lithium and phosphate is a key value add to that supply chain. But can it be done directly? That's to be determined.

It's one of the reasons, by the way, that we, in fact, are going to work on a demonstration plant of reasonably serious scale to help in the definition of the combination of product and the end users. So I think the answer is maybe, but subject to more work. But in any case, Tim, whether it's direct to LFD or just the component feedstocks, the message coming from the market is how soon can you do it and how much can you deliver. That's basically what the combination of end users of that particular product are saying.

[Timothy Hoff, analyst]

Okay. Great. It sounds interesting. It would be great to see higher realizations flow through this value add.

[Kenneth Brinsden, executive]

Yes. An important consideration there, too, is the success we're generating with the BMX platform would indicate we should be able to do it with multiple products and help with respect to price transparency over time. And it feels like that's going to be a very important tool for the company in the future as well.

[Timothy Hoff, analyst]

Perhaps finally, around BMX platform. Have you had much more interest on placing third-party volumes onto that yet?

[Kenneth Brinsden, executive]

Yes, still a subject of discussion, for sure. And yes, look, I think broadly speaking, the answer is yes, there is interest in a model like that. And to be clear, from Pilbara Minerals point of view, we are also supportive of that objective because we think that the idea that more product, more users, more customers and varying products is an important development for the industry. It's one of those situations where the rising tide should flow to all boats.

[Operator]

Your next question is from Al Harvey with JPMorgan.

[Alistair Harvey, analyst]

Just one for me. Dale, you mentioned the sterilization drilling actually turned up some decent results. I was wondering if you could indicate roughly where that is with respect to the 2 pits and if that does have any impact on the space to build out both your expansion plans.

[Dale Henderson, executive]

Thanks, Al. The location of that sterilization drilling is just out to the west of Central pit. So you can see there's a figure in the announcement there. As to its inclusion in the pits, yes, it looks like we should be able to bring some of that, which is good. Yes. Thanks.

[Operator]

The next question is from Glyn Lawcock from Barrenjoey.

[Glyn Lawcock, analyst]

I was just wondering if you could maybe help provide some guidance on how you plan to price and sell the Ngungaju volume when it comes online this quarter now? I mean I assume it's all uncontracted. So are you planning to put a lot of it into the spot market via the BMX or it will be sold against a particular index? Or just any -- because I know you gave us color around greater than 4,000 for the quarter. But just curious how you're going to plan to put Ngungaju in. And in answering that as well, just are you carrying any legacy tonnes through into the June quarter now? Or should we really be thinking you get closer to some index?

[Kenneth Brinsden, executive]

Thanks, Glyn. Broadly speaking, the additional production that's represented by the Ngungaju Plant is destined for the BMX platform. So broadly speaking, that's the intent, but it goes -- it's all blended together. So whether it's Ngungaju Plant production or Pilgan Plant production. It defines basically a single product. It's really just the incremental growth that comes out of Ngungaju that represents unallocated offtake and therefore is available to trade on the BMX platform.

An interesting side note, Glyn, is that we still get bids purchasing the product outright, so people basically give us unsolicited bids to try and access the product. But our preference, I think broadly speaking, our preference is to help with price transparency by getting these auctions up and running and doing that on a more regular basis to ultimately build transparency and who knows, even over time, an index based on the frequency of those trades from multiple sellers and multiple buyers.

What does that all mean? Well, in summary, it means that the frequency of the auctions should be growing from here. We like the success that we've generated so far, albeit sporadically. Our intent leading into the end of the year is that they become much more frequent and a more sort of built in part of our business model and becomes a bit more normal as compared to what is currently pretty exceptional.

What else to share? Where the pricing lands this quarter, we have that one shipment that's going to go -- that sold -- well -- sorry, sailed this quarter, albeit priced last quarter. But other than that, the balance of the tonnes shipped will represent what is in effect the current price. At least it's only a small amount of lag, maybe a month or 6 weeks. What do we reference? Well, that they're typically sold in offtake. Offtake in the current market will go for between $4,300 and $4,700 a tonne, roughly.

[Glyn Lawcock, analyst]

You're saying against a number of indices, I assume, depending on what the customer wants.

[Kenneth Brinsden, executive]

Well, actually, the pricing model for each of the customers are very similar. They're not exactly the same, but they're very similar. And they rely on typically China domestic pricing to chemicals. Pilbara is a bit unique, Glyn. I think you've raised a good point. Pilbara is one of the only Western stocks that you can say is wholly exposed to the domestic price in China, which has clearly been a price leader as it relates to pricing references for all lithium raw materials.

You can see our peers globally pricing -- well, I would consider pricing their chemicals very low in comparison to the prevailing shorter-dated pricing mechanisms like those in China. Now the good news is that Pilbara Minerals is in effect largely, if not fully, exposed to that market. So we're one of the few that gets the ability to fully participate in that amazing price outcome.

[Glyn Lawcock, analyst]

Okay. So just to clarify then, so when you get Ngungaju up at sort of 200,000 tonnes per annum, I guess we're looking at sort of 16,000 to 17,000 tonnes a month, roughly. Would you do that in one auction? Or would you be running sort of a couple of months? Just trying to see how you might try and judge the liquidity because obviously, it's liquidity versus price, which has an impact as well.

[Kenneth Brinsden, executive]

Yes, yes. No, I agree with that. We basically look to parcel the cargo consistent with what we're trying to achieve on the shipping front. And what that means is that an auction would probably be in the range of 5,000 to 10,000 tonnes per cargo. The benefit that we get in that is to be able to either parcel it as a hold so it lowers the cost of freight or parcel it with another vessel that we're already sending North anyway. So logically, in the range of 5,000 to 10,000 tonnes per auction. And yes, they would become more frequent, as you described, when the Ngungaju production hits its straps.

[Operator]

There are no further questions on the phone lines at this time. I'll hand the call back over to the Pilbara Minerals team for any questions from webcast viewers.

[Kenneth Brinsden, executive]

Yes. Thank you, Gaylene. And I understood it clears Nicholas to see whether we've got any additional questions.

[Nicholas Read]

Thanks very much, Ken. Good morning, everyone. We did have lots of websites -- web-based questions. So I'm just going to skip through the ones that have been dealt with. We had a few on production run rates and COVID impact in China, which I think have been dealt with.

So the first question here is from James Edmends from Gilchrist & Co. He says, "I'm interested in hearing your thoughts on the long-term pricing of spodumene. Analysts seem to be getting closer to the mark with short-term prices, but one in particular has left the long-term pricing at USD 800 a tonne despite the success with recent auctions and strong market demand for the foreseeable future. Can you give us your thoughts on the longer-term outlook?"

[Kenneth Brinsden, executive]

Yes. Well, we're obviously dealing with 2 different things there, I think, in part. So short-term pricing -- short- to medium-term pricing is a function of the critical shortage in the market. But it's not unreasonable to expect that at some point in time in the future. We obviously don't know when, but at some point in time, there is going to be a normalization in the supply/demand dynamic, in which case pricing will more than likely reflect cost base. And that's an issue, if you like, that's yet to be resolved by the analyst community and those keen observers of the market.

Now I think that probably the key point I would leave with you there is to say historical norms are going to be well and truly broken down. So the idea that spodumene long-run pricing might be $600 to $650 a tonne is long gone. And that's because the industry -- lithium raw materials industry needs to grow about tenfold between now and 2030. To do so, projects are going to be built that are nothing like historical norms with respect to cost. So the right-hand side of the cost curve gets built out. And by implication, the long-run price must be higher.

Now that doesn't happen often in industry and in natural resources, but it's clearly going to happen here in lithium. I hate to draw the analogy of iron ore, but to describe the dynamic on what I'm talking about here, if you look at iron ore and the price back in, what would you say, 2003, iron ore is priced at USD 30 a tonne. Here we are today with iron ore priced between $100 and $200 a tonne over the last couple of years, and it's happened because the projects have been built to deal with very, very rapid escalation in demand growth.

Now in that same period of time line, ore probably tripled. Here, we're talking about an industry that has to grow by tenfold. So clearly, the price -- the long-run price has to be materially higher than historical norms to support the industry. Otherwise, it won't grow. So what does that actually result in? I don't have a crystal ball, but I can assure you it's much higher than what people thought it might have been even just 3 or 4 years ago.

[Nicholas Read]

Right. Thank you, Ken. Next question is from Mark Bugden. It's for Brian. He says, "Am I right in assuming that the syndicated facility now has a principal component of between USD 100 million and USD 105 million?

[Brian Lynn, executive]

Yes. Thanks for the question. Yes. It's a little bit higher than that. Currently, the principal component is USD 110 million.

[Nicholas Read]

Thanks, Brian. The next question comes from [ Matthew Speaks ], and it's a 3-part question. He says, "Can you give us an update on how you're progressing exploration on your other tenements? Also, how long will Mt Francisco go unexplored? And how confident are you that it could be developed in the future? And the third part was how likely is a second POSCO-type deal perhaps in Europe?"

[Kenneth Brinsden, executive]

Okay. Thanks for the questions. Well, on exploration, I think Dale hit the nail on the head saying the more we drill, the more likely we are to grow the resource and ultimately the Pilgan inventory. The Pilgangoora pegmatite system that hosts the spodumene is incredible. It stretches over approximately 14 kilometers north to south, a decent chunk of which is still yet to be explored in any detail. And that's why when we do things like sterilization drill holes because we want to expand a waste up means that we trip over some spodumene. So yes, it's fair to say that as we continue to drill, there will be more discoveries.

The other thing that helps in that regard is, in fact, the acquisition of the former Altura operations because it opens up areas that may not have been explored historically that can now be explored. So the combination of all those things means that the resource is, in our view, highly likely to grow over time.

On the question of other projects, well, we do continue to chip away at them. But I guess the biggest review is to say that the Pilgangoora system is that good that it has to be your focus. So that's why we typically explore there, and we do, in the scheme of things, relatively little elsewhere. That doesn't mean that they won't be explored. It's just that they're not a priority. Pilgangoora itself is a priority because of its enormous exploration potential.

With respect to the downstream interest, well, the POSCO joint venture represents -- well, let's just say it's the start of our downstream participation because strategically, what we're trying to do is more deeply align our lithium raw material into a more sophisticated supply chain and do it with -- in relationships with people that are key to the future of the industry. And we would definitely put POSCO in that category because of the combination of the skill inside their organization, the scale and ultimately being a key entree to the Korean market, Korea being the next big mover beyond China in lithium ion battery-making capacity and a strategic entree to especially North America because of the geopolitical interaction and important relationship between the U.S. and South Korea.

Where do we do that elsewhere? Well, yes, Europe is a key target. And we would say that the Mid-Stream product is a really important development for the European markets. So hence, our focus there. What we think we can offer with the combination of the Calix technology and the value-added lithium salt is direct entry to European markets and playing with sophisticated players downstream to make that happen. So it's definitely an important objective for the company.

[Nicholas Read]

Thanks, Ken. The next one is from Trent Barnett from Euroz Hartleys. How often a BMX auction is likely to be now every month?

[Kenneth Brinsden, executive]

Yes. Well, we ran the auction yesterday for approximately mid-June delivery. And we'll obviously be keeping an eye on how Ngungaju production is unfolding during the June quarter to then subsequently lock in other auctions. I don't think it directly translates to necessarily monthly auctions from here. But it will definitely be getting more frequent leading into the end of the year. So I think that's the way to think about it.

We're motivated to establish price reference as frequently as we can because it helps with all of our marketing efforts, in which case I'd like to think that we're aligned with shareholders about making that happen, and we're working incredibly hard to make them more frequent.

[Nicholas Read]

Thank you, Ken. The next one is from Victor Gomes from Eiger Capital. He says, "Can you provide any early estimates of CapEx for the P680 and P1000 expansion projects and the likely phasing of the CapEx spend?"

[Kenneth Brinsden, executive]

Yes. Victor, we historically talked about spending about AUD 300 million on the combined projects that get us towards that 1 million tonne per annum mark. That was the previous print on what we used to call the Stage 2 project. Broadly speaking, for that scope, that hasn't materially changed. However, we are -- and we'll likely have more to say about it in the coming months. But we are looking to increase the scope of the project to include potential in new crushing capacity and ore sorting capacity. So the net effect of that will be to increase the project. That's part of the feasibility work and the FID that's in progress. So we'll have more to say about that in the coming month or 2.

[Nicholas Read]

Thanks, Ken. Just one final one from an investor here. The dividend question always comes up every call. He says, "What conditions, market or operating conditions, would the company consider appropriate before dividends are paid?"

[Kenneth Brinsden, executive]

Yes. I love the dividend question. I guess it's a nice problem to have when the question keeps coming up in each meeting. Well, the answer there is that cash and operating cash flow is going to be focused initially on what's required within the business to grow because clearly, given today's market conditions, that represents the best way to add value to shareholders.

So the first cab off the rank is to be very clear about how we fund our expansion initiatives. So that's number one. Number two, the idea that you hand back some cash to shareholders, I think it's something that would be fairly close to our Chairman's heart. But you would only do it in a circumstance where you've been very careful about how you otherwise fund the business for the purpose of growth because that's where the priority should be.

[Nicholas Read]

Thanks, Ken. And that's it for the webcast questions.

[Kenneth Brinsden, executive]

Okay. Thanks, Nick. Gaylene, I think we're done. Thanks for everyone's participation. Really appreciate the time on the call today, whether it was via the Chorus line or the webcast. Thanks, Dale and Brian, to your input. And we're done, Gaylene. So back to you. Thank you.

[Operator]

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