Allkem Limited (OROCF)
Q4 2022 Earnings Conference Call
August 24, 2022 19:00 ET
Company Participants
Martin Perez de Solay - Chief Executive Officer and Managing Director
Christian Cortes - Chief, Staff
Christian Barbier - Chief Sales and Marketing Officer
Keith Muller – Head, Asia-Pacific Operations
Conference Call Participants
Reg Spencer - Canaccord
Al Harvey - JP Morgan
Hayden Bairstow - Macquarie
Kate McCutcheon - Citi
Mitch Ryan - Jefferies
Max Vickerson - Morgans
Lachlan Shaw - UBS
Matthew Frydman - MST Financial
David Deckelbaum - Cowen
Presentation
Operator
Good morning and welcome to the Allkem 2022 Full Year Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you.
I would like to hand over to CEO and Managing Director, Martin Perez de Solay, to begin the call.
Martin Perez de Solay
Thank you, Paul and welcome everyone and thank you for joining us today for Allkem Limited financial results for the year ending 30 June 2022. I will provide an update on our very successful merger, our operations, project execution, growth strategy and the lithium market. Also filling in for our CFO, Neil Kaplan today is Chief of Staff, Christian Cortes, who will present our financial results.
We will be going through a slide deck. On Slide #4, I am pleased that we have achieved the record financial result in the first year of the transformational merger of Orocobre Limited and Galaxy Resources. The merger has generated substantial value through a combination of outstanding operating assets and development projects. We have restructured our business around our global portfolio and we continue to strengthen the management, operating and development teams by attracting the highest quality personnel. Through effective management, the group has significantly improved safety performance and achieved record production at both Mt Cattlin of 194,000 tons of spodumene concentrate and Olaroz of the 10,000 tons of lithium production.
We enhanced our sales contract team – excuse me, we enhanced our sales contract terms with our customers and continue to improve product quality and maintain our lowest quartile cost performance. As a result, we have been able to capture the benefit of the higher lithium prices to deliver record revenues of $770 million and EBITDAIX of $515 million. With our robust balance sheet, including cash and cash equivalents of $664 million and two revenue generating operations being supplemented by new operations in financial year ‘23, we are fully funded to deliver our global growth pipeline.
New developments and expansions are expected to see the business expand threefold by 2026, with the aim of maintaining 10% market share as the lithium industry continues to grow with increasing adoption of electric vehicles. During the year, we advanced all our development assets. Olaroz Stage 2 has now reached over 91% construction completion, designed to deliver an additional 25,000 tons of technical grade lithium carbonate product. In line with our strategy to diversify our product offering to customers, we completed construction of the Naraha hydroxide plant and commissioning is underway. And we are well advanced and commenced the construction of the Sal de Vida Stage 1.
We also completed feasibility studies on three development projects, which include a 2.5x increase in the interim order of results to 16 million tons of LCE making the combined Olaroz/Cauchari resource of 22.5 million ton, one of the largest in the world, a 40% increase the Sal de Vida production capacity to 45,000 tons per annum in two stages and a 10% increase in the resource to 6.85 million tons of LCE. The James Bay project economics demonstrate a very competitive hydro project that gives access to – that gives us a unique access to the high growth North American market.
On Slide #5, there has been a clearly material step up in the scale and cash flow of the business over the last 2 years. In the next 2 years, we represent another step up in the business where we can expect to see first production on ramp up of the Naraha and Olaroz Stage 2, Sal de Vida Stage 1, Sal de Vida Stage 1 construction and first production with sequential development of Stage 2, and the construction of James Bay. In addition to this, we have further growth opportunities in the earliest stages of development, which I will discuss in further detail later in the presentation. This includes Olaroz Stage 3, James Bay downstream, and optimization projects in Argentina.
Firstly, sustainability remains a core focus in Allkem’s journey and we continue to be recognized for our leading ESG practices. Not only did we deliver record production volumes as we continue to successfully operate within our COVID-19 biosecurity protocols and improve our overall safety performance, achieving a TRIFR of 2.6 for the rolling 12-month period. This is a reflection of our focus and excellent operational management despite increasing our global footprint operational and construction activities. Further, you can expect us to continue working with all community stakeholders to create long-term share value through areas such as local employment, education and procurement. We also continue to advance our strategy to deliver responsible products in respect to climate change and human rights.
I will now hand over to Christian to go through our financial results.
Christian Cortes
Thank you, Martin and good morning to everyone. I will take you through the financial results slide starting from Page 8. Following the merger and substantial increase in lithium carbonate and spodumene prices, Allkem achieved record revenues of $770 million, which is substantially higher than prior years. With the strong revenues and effective cost control measures at Mt Cattlin and Olaroz delivering some of the lowest cost lithium produced in the world and very strong EBITDAIX of $513 million, with a profit after tax of $337 million. Cash on the balance sheet has been boosted to approximately $664 million, with a combination of cash added from the merger and strong free cash flow generated during the reporting period.
Moving on to the next slide, record revenues of $770 million with Mt Cattlin contributing approximately $452 million for the 10-month period post-merger and $293 million from Olaroz, EBITDAIX of $513 million included Mt Cattlin’s contribution of $336 million and Olaroz contribution of $220 million respectively. Spodumene average CIF unit sales price of $2,221 compared to $415 for the prior period and lithium carbonate FOB unit sales price of $23,398 in FY ‘22 compared to $4,983 in FY ‘21. Discipline cost control in a challenging environment of inflation, with Mt Cattlin’s operating unit costs of $420 and cash margin of 80%, whilst Olaroz unit cost of sales of $4,282 approximately 11% higher than prior year due to inflationary cost pressures and a higher sales mix of battery grade lithium carbonate also delivering record high cash margins of 82% for the period.
Higher depreciation and amortization costs relative to prior year, was due to the addition of Mt Cattlin’s operation. This resulted in a record profit before interest in foreign exchange of $463.1 million. Net finance costs are lowered to prior year mainly due to reduced interest rates for a large portion of the year and reduced Olaroz debt outstanding balance. Income tax expense of approximately $93 million, representing an effective tax rate of 22% has benefited from $64 million of previously unrecognized tax losses brought into the balance sheet partially offset by foreign currency movements and hyperinflation in Argentina. Net profit after tax of $337 million included $38.5 million of once off costs related to the purchase price allocation and transaction cost associated with the merger.
Moving on to the next slide. Profit performance bridge to prior year pro forma EBITDAIX include a very strong pricing increase for both spodumene and lithium carbonate, delivering revenue increases of approximately $600 million, which after taking cost variances for the period, delivered a very strong increase of approximately $495 million of EBITDAIX during the period. Improvements on product quality, focus on cost control, and renegotiation of sales contracts and record production are key in delivering the increase in profits.
Moving to the cash flow and balance sheet. Cash on hand at balance sheet date of $663 million was up by $405 million compared to prior year, which includes $210 million added from the merger and the net increase of $195 million generated during the period, which is attributable to the strong operating cash flow of $475.6 million partially offset by CapEx spend of $261.4 million.
Cash balance also includes $7.9 million and $83.9 million, which have been set aside as pre-completion guarantees for Naraha and Olaroz. With the $83.9 million related to Olaroz available for Allkem to fund CapEx, VAT and working capital related to the Olaroz Stage 2 expansion. Bank debt of $228 million relate to the project finance for Olaroz, which will reduce to approximately $210 million in September. And working capital facilities were fully repaid during the year in Argentina. CapEx spend of $261.4 million mainly relates to the progression of Olaroz Stage 2, Sal De Vida and James Bay projects.
In summary, record revenues, EBITDAIX and net profit after tax, robust balance sheet with cash on the balance sheet to fund the pipeline of projects and an expectation of a very strong financial year ahead of us.
Thank you. And I will pass back to Martin.
Martin Perez de Solay
Thank you, Christian and I will now provide an update on our operation starting with Mt Cattlin. On Page 13, we achieved record revenue of $452 million from sales of over 200,000 tons of spodumene concentrate at an average selling price of $2,221 per ton CIF for the period. Despite rising prices, we remain focused on strong cost management. As a result, high gross cash margin of 81% was achieved for the year in line with low cash cost of production of $420 per ton. Excellent operational performance was due to favorable head grades and improved processing rates and recoveries, particularly in the first half of the financial year. Towards the end of the year, the ore source commenced transitioning from 2NE pit to 2NW pit, where pre-stripping works continue.
Challenges arising from COVID-19 and the Western Australian labor markets continue to impact operations in WA, including Mt Cattlin in the September quarter. Mitigation mechanisms have been implemented and will deliver progress in Q2 financial year ‘23 and into the first – the second half of financial year ‘23. These include the mobilization of an additional mining contractor and the replacement and sizing of mining equipment with the existing mining contractor that was implemented in August and reinstallation of magnetic ore sorters to allow processing of low grade stockpiles to be commissioning – to be commissioned at the end of September.
As a result, financial year ‘23 production forecast has been revised to 140 to 150 tons of SC6 and production is expected to increase across each respective quarter with an average cost of approximately $900 per ton. This differed production will be partially offset by the sale of 130,000 tons of lower grade spodumene concentrate to existing customers in the first half of financial year ‘23. We recently increased our mineral resource tonnage by 21% to 13.3 million tons at 1.2% grade principally reflecting the application of an 1,100 pit shell at 6% lithium oxide concentrate grade compared to the $900 per ton using the 2021 estimation. We are also making good progress with our resource extension drilling to test immediate extensions to mine life. We are about 40% through the program with 60 holes completed to-date and over 14,000 meters of drilling and we will provide an update in the – an update of results in the September quarter.
At Olaroz, on Slide 14, we achieved record profitability driven not only by stronger pricing, focused cost control and strong operational management, which delivers stable high quality production, with an improved sales mix of 54% battery grade and better price realization. Record revenue of $293 million reflects a 341% increase in revenue from the prior year largely due to another FOB pricing increase of $176 to $23,398 per ton. The material increase in revenue was only partially offset by industry-wide inflation. Our gross profit margin remained very high at 82%.
Now, I am moving to the project execution of our development assets and other projects that we are advancing to further – to unlock further growth. On Slide 16, we are focused on executing our growth pipeline to triple production. To do this, we must optimize our operations and deliver our development projects, while we minimize the impacts of the pandemic and other global challenges. In addition to this, we are investigating a number of value-adding growth projects, including advancing studies from Cauchari/Olaroz Stage 3 and James Bay downstream, the soon-to-be-acquired Maria Victoria tenements advancing the James Bay downstream project.
The expansion at Olaroz is well advanced, with overall construction at 91%. Ponds are complete, commissioned and filled with brine. Lime plant #3 is complete and commissioning. Lime plant #4 is near completion. The soda ash plant is nearly complete and the carbonation plant has reached construction progress of 69%. First production of Olaroz Stage 2 is anticipated by the end of this calendar year.
On Slide 19, at Naraha, we successfully and safely completed the construction activities during the year in the backdrop of the global pandemic and commissioning activities are well underway with first production expected early December 2022 quarter. This project will provide exposure to the high value lithium hydroxide market, with production expected to be around 10,000 tons per annum.
At Sal de Vida, we are leveraging our skills from Olaroz and construction is progressing well with the first two strings of ponds at Stage 1 at over 32% completion. During the remainder of this calendar year, we are focused on commissioning the first two strings of ponds and commencing the construction of the carbonation plant. First production from Stage 1 is expected by the second half of calendar year ‘23 and Stage 2 development will occur sequentially after that.
At James Bay, we have signed an agreement with Hydro-Quebec and we are progressing our regulatory approvals in anticipation for construction commencing in early 2023 calendar year. We will commence a drilling program in the December quarter to determine the upside potential of the resource that remains open to the north, south, east and also at depth. James Bay downstream provides an opportunity for a cornerstone regional processing facility to serve the North American market. We have been investigating locations for a conversion plant in Quebec that could be close to proximity – that will be in close proximity to rail and other infrastructure that will deliver material economic advantages. Capacity will be linked to James Bay spodumene production and potential resource expansion with the optionality to process third-party ore. Our pre-feasibility study is on track for completion in Q1 calendar year ‘23.
The Olaroz and Cauchari resource is one of the largest in the world. And with the recent agreement to acquire Maria Victoria tenement provides further potential to unlock significant development pathway for Olaroz Stage 3. We are currently reviewing the development options for Olaroz Stage 3, setting a substantial increase of production capacity for Stage 3 above the previous studies and advancing ongoing studies for conventional and alternative processing technologies.
On our continuous improvement projects on Slide 23, we will discuss dedicated purification facility. We have a clear strategy to capturing as much of the chemical supply chain as possible to maximize return to our shareholders. As such, we are progressing an additional dedicated purification facility to supply increasing demand for battery grade product. This maybe located near Jujuy, which will benefit from a lower altitude, proximity to service, contractors and labor, thereby reducing Olaroz capital costs. Currently, we are completing a Class 3 estimate engineering package, which is expected to confirm lower cost and better sustainable performance with increased carbonite recoveries. This project will allow Olaroz Stage 1 to become a dedicated technical grade facility, which would increase lithium carbonate production by 30% to 40%.
The enhanced brand recovery is progressing and applicable to both Stages 1 and 2 at Olaroz. This would likely see the lithium recovery in primary processing increase from 75% to approximately 95%, resulting in additional production. Currently, we are reviewing and piloting processing options with a combination of our standard technology and new technologies. We expect results to have high return on investment and add material value and aim to complete a feasibility study for the end of the first half of calendar year ‘23. We are also commencing studies on the local supply and manufacture of key reagents to meet increasing requirements with higher production at both Olaroz and Sal de Vida. The objective is to develop self-sufficiency and maintain lowest quartile cost. Options are being considered for the development of Allkem owned land properties located in the Northwest of Argentina.
Moving on to the lithium market on Slide 26, we are seeing a strong ramp up of Brownfield expansions, but this is still unable to reach surge in demand. In immediate and long-term, we expected the market to remain tight. Customer demand for electric vehicles remained resilient despite changes during the year, with global EV sales up 71% from the prior year and up 123% in China from the previous year. Prices rallied to new record during the year and our marketing efforts maximize our financial year ‘22 realized pricing and revenues.
Our strong customer relationships back our long-term contracts. At Mt Cattlin, demand in the spodumene market remains robust and spodumene concentrate pricing in the September quarter is expected to be above $5,000 per ton CIF. At Olaroz, we successfully restructured our contracts phased out from favorable commitments to capture higher realized pricing in line with upward pricing momentum. Average pricing for the lithium carbonate is expected to be in the $47,000 per ton range for the first half of financial year ‘23 excluding Naraha feedstock.
Following the merger of Orocobre and Galaxy, we have had record breaking operating and financial results. We have also successfully accelerated our growth projects to meet our target of tripling production by 2026. We will strive to continue delivering excellent results by optimizing our operations, executing our development assets and advancing our growth projects. The industry supply and demand profile requires new development projects and we are in a very unique position with a clear growth strategy and with further upside to deliver the scale and the product flexibility required by the customers as the world transitions to a net-zero economy.
We will now move on to the Q&A session.
Question-and-Answer Session
Operator
Thank you, all speakers. [Operator Instructions] Speakers your first question comes from the line of Reg Spencer from Canaccord. Your line is open.
Reg Spencer
Thank you. Good morning, guys. Congratulations on a very good FY ‘22 result. My first question relates to your guidance for pricing in the September quarter of $47,000 a ton for Olaroz production. You mentioned that excludes Naraha, which I presume relates to build up of inventory ahead of commissioning. Can you let us know what kind of net impact that might have on pricing?
Martin Perez de Solay
Thank you, Reg. Christian Barbier will answer your question. The guidance I gave was for the first half not just for the quarter.
Christian Barbier
Yes, Reg. This is Christian Barbier speaking. Thanks for your question. Look, it doesn’t really have a material impact. We are supplying technical grade feedstock to Naraha and as such, we thought it is more appropriate and more representative to continue to report prices on the carbonate that we sell in the market. What we see is quarter-on-quarter, an improvement in our weighted average carbonate prices and that’s what we also wanted to report in this half year guidance of $47 per kilogram.
Reg Spencer
Okay, excellent. Thank you. Second question relates to Mt Cattlin, you mentioned that you would be looking at selling 100 or 1,000 tons of low grade concentrate. What kind of pricing should we expect for that material and should we work on an implied pricing based on a 6% benchmark?
Christian Barbier
So, look, Reg, we – firstly, it’s about 130,000 tons of these low-grade concentrates that we are planning to sell during the half year. So, we reported a price range of between $500 and $600 per ton for this product. Now if you make your own calculations, you will see the grade of this product is within the range of 1.1% to 1.3% Li2O. So it is a significantly lower grade product to the SC6 that we normally market.
Reg Spencer
Okay. But I presume given that the production costs for that material are going to be beneath an expected selling price?
Christian Barbier
Of course, yes, we will not sell because the reason also we are doing this is because we wanted to complement the Li2O units to our customers in order to continue to supply important Li2O units.
Martin Perez de Solay
Reg adding on that, it is a very profitable operation around the taking.
Reg Spencer
Understood. Last question is for James Bay, I am quite interested in your comments on the sizing of the downstream there to handle any expanded resource or third-party feed. Are you in a position to guide us as to what kind of total capacity that might be? I know, there is a lot of work to be done and you have got to complete a pre-feasibility. But should we be thinking about linking that directly to imply capacity based on James Bay or something materially larger than that?
Martin Perez de Solay
Listen, you said the answer yourself, it’s a lot of work yet to be done on that project. What we are seeing is a tremendous potential for James Bay to go beyond its currently expected production. And that’s why we are undertaking this drilling program to prove – to resources in the area of north, south and east of the current picture – of the current picture designs. And that will tell us the definitive capacities there. We see a tremendous opportunity in the Canadian market. It’s not just past, but there are many other projects that are arriving in the area that we see them being smaller in terms of total capacity and head grade which will require further processing capacity. We also see a tremendous demand in the hydroxide market in the U.S. building up and as a consequence, we are including on saturating these opportunities into our feasibility study.
Reg Spencer
Understood. I have to agree with you on the potential in Canada today. So I will pass it on. Thanks very much, guys.
Martin Perez de Solay
Thank you, Reg.
Operator
Your next question comes from the line of Al Harvey from JPMorgan. Your line is open.
Al Harvey
Good morning, Martin. Just to follow up on the carbonate price guidance, I am wondering if you could give us the split of battery grade versus primary grade there and maybe any guide on the transfer price between Olaroz and Naraha?
Martin Perez de Solay
I will ask Christian to answer the details on your question. The split is going to be very similar to what we’ve seen this year based on the contracts.
Christian Barbier
So yes, at the moment, the split is about 50-50 between battery grade and technical grade. But as the Olaroz expansion will kick in, the technical grades will increase in proportion to about 75% of the carbonate production.
Al Harvey
Thanks for that. And again, maybe another follow-up on the lower grade concentrates coming out of Mt Cattlin. So, can you just reiterate who is taking that product and how does that make money would be quite expensive to ship and whatnot? Can you just step us through that?
Christian Barbier
Yes. While we have a number of converted customers in China, which is the main market for converting spodumene at the moment and these people are able to process lower grade concentrate as well as spodumene 6% Li2O concentrate. So basically, these are – this is the same population of converters we are supplying to or we are in discussions with at the moment. In terms of prices, bulk shipments between Australia and China are about $80 a ton at the moment. So with the prices that we have reported, this is still a very profitable product.
Al Harvey
And so is the 1.3% concentrate essentially like direct shipping or like you have some higher grade stockpiles or does it go through the plant and take the same processing to get it to a concentrate?
Martin Perez de Solay
Let me introduce Keith for this answer, which is more technical.
Keith Muller
Al, it’s Keith, thank you for your question. I just want to highlight that out of the 130,000 tons that we intend to do sell this off, we have already shipped 30,000 tons of that. It’s a combination of a legacy stockpiles on site as well as material that’s coming through the process plant at the moment. So, about 50% of what we are intending to sell is coming currently from the process plant. So, it’s a stream that we are tapping into that we haven’t previously done and then 50% of that material is legacy stockpiles that we are basically just taking to port and shipping.
Al Harvey
Great. Just my – sorry, guys. Just my final one there, just looking at the Mt Cattlin resource that’s going up, but reserves haven’t moved up as well, when can we expect that larger resource base to convert into reserves?
Martin Perez de Solay
I will let, Keith, again. So the depletion that we have reported is the mining depletion over the last 18 months since the last report on the March 31, 2021. We were expecting to complete resource infill drilling as well as the resource expansion by the end of this financial year and then we will update the resource in reserves early in the second half of FY ‘23.
Al Harvey
Thanks, Keith.
Operator
Thank you. Your next question comes from the line of Hayden Bairstow from Macquarie. Your line is open.
Hayden Bairstow
Hi, guys. Just a couple for me. First one just on the ramp up of Olaroz, just keen to understand the percentage of battery grade you are expecting or how quickly you can get that to – I guess the reasonable target was closer to 100% on Phase 2, just to understand what we should be factoring in during the ramp up phase in terms of moving to full battery grade product?
Martin Perez de Solay
It’s – Olaroz Stage 2 is designed to produce technical grade lithium carbonate, not battery grade. That’s why Christian was mentioning that once Olaroz Stage 2 kicks in, we will see the technical grade production going up, while we maintain the same level of sales for battery grade production from Stage 1. What I referred earlier in the projects we are looking into, we are seeing a very large market for battery grade growing and growing and we are thinking of other options to maximize production of battery grade going forward so as to meet customer demand, but Stage 2 is 100% technical grade facility.
Hayden Bairstow
So, what are the options to go to battery grade?
Martin Perez de Solay
Well, the options to battery grade is Stage 2, we will produce technical grade lithium hydroxide that will be converted into battery grade hydroxide in Naraha. And as I said before, we are analyzing a larger purification facility at a more convenient size will result in lower cost and increased production from Olaroz facilities both Stage 1 and total output of battery grade.
Hayden Bairstow
Yes, okay. And then on James Bay, just the discussions with the government etcetera on – is that ball likely going to shape as a fully integrated project into a hydroxide or do you think it will be initially a spodumene project that you would sell into the European market or North American markets and then look at downstream later on?
Martin Perez de Solay
The current, this has always been the same. The current approvals and discussions with the government are for an upstream spodumene project and we are now working on the downstream project that will take that spodumene and convert it into hydroxide for the U.S. market. Given the timing, the approvals and the starting of construction of the upstream projects in the first quarter of next year, we expect to sell some spodumene into the U.S. and European markets for a few years until we get the downstream facility up and running.
Hayden Bairstow
Okay. Just to follow on just on the technical grade conversion to battery grade or through hydroxide, can you just give us an idea of how long that actually takes? If we look at production coming out of Olaroz to getting through the battery grade product and then delivering it to customers, I mean, how many – how much additional time does that add to the production pipeline if you will?
Martin Perez de Solay
Well, that’s not additional time to the production pipeline itself, because it’s basically running the same purification circuit that we are running today on our product – on more products and finding a better location for our purification circuit to be able to operate it and further lower costs. That project is currently being analyzed and we will not see the battery grade volumes increasing. It’s exactly the opposite. We shall see battery volumes increasing as we start to produce from this purification project which is currently in the study stage.
Hayden Bairstow
Okay. Thanks, Martin.
Operator
Thank you. Your next question comes from the line of Alexander [indiscernible] from Citi. Your line is open. Alexander, your line is open. Alexander, just checking that are you there? We are just going to return Alexander back to the queue. And your next question comes from the line of Clarke Wilkins from Perpetual. Your line is open.
Kate McCutcheon
Hello. Hi, sorry. It’s Kate of Citi. Is my line open now?
Operator
It is.
Kate McCutcheon
Hi, Martin, I am not sure what’s going on there. Thanks for the call. Guidance to Mt Cattlin, can you just talk me through what happens such that you’ve had to revise guidance around 30 days after it seems that was a metallurgical issue with the price? Why have you had to reset total material movement assumptions so soon? Thanks.
Keith Muller
Yes, Kate, it’s Keith. I will take the question. So during the first quarter, we anticipated to process a small transitional lens that we first intersected in the upper portion of the ore body. This first lens turned out to be of fine grained spodumene material, which is not able to be processed through the plant in its current configuration setup. In addition, the delays in pre-strip from the previous calendar year following the COVID restrictions in WA has limited our ability to open up more than one mining phases and then has restricted us to access further ore deposits and the more better higher grade core spodumene ore body that we are anticipating to now open up in the second quarter of this financial year.
Kate McCutcheon
Okay, okay. Yes. And then you have previously said in June quarter you have expected carbonate pricing for September quarter of around $41,000. Is that still the case and then the new news today is weighted price for the half of $37,000?
Christian Barbier
Yes, Kate. This is Christian Barbier speaking. Look, yes, we gathered these prices in reality during the current quarter. Our weighted average price we expect to be a little bit higher than previous guidance and continue to have a quarter-on-quarter increase. So the $47,000 a ton that we have indicated the weighted average over the half year, you can consider that will be slightly lower in this September quarter and slightly higher in the December quarter.
Martin Perez de Solay
But in both cases it will remain above the guidance we gave for the quarter.
Christian Barbier
Yes, absolutely.
Kate McCutcheon
Yes, okay. Thank you.
Operator
Thank you. Your next question comes from the line of Mitch Ryan from Jefferies. Your line is open.
Mitch Ryan
Good morning. Just one question, just wanted to clarify as the lower grade sales from Mt Cattlin sits outside of the existing – the revised guidance?
Martin Perez de Solay
Yes, it is.
Mitch Ryan
Yes. And that previously would have been accounted for as waste?
Martin Perez de Solay
That’s how the product material being told I guess.
Christian Barbier
So, Mitch, yes, this is Christian again, we were not selling this product before. And as Keith mentioned, it’s a combination of some existing stockpile and some product stream from the plants. And so it is not something that we were marketing until this current quarter.
Mitch Ryan
Okay, thank you. That’s it for me.
Operator
Thank you. Your next question comes from the line of Max Vickerson from Morgans. Your line is open.
Max Vickerson
Thank you, guys. Just firstly quick question on lithium hydroxide prices as Naraha is ramping up, how relevant are things like the LMA benchmark in terms of your pricing?
Martin Perez de Solay
So Max, the first thing is we intend to produce battery grade hydroxide from Naraha. However, it will take some – it will take a few months to first adjust the quality, but also to have the product approved by battery grade customers. There is no battery grade hydroxide spot market. All battery grade hydroxide customers are buying on long-term supply agreements. So during the first few months until the product is approved – the battery grade product is approved we will be selling hydroxide technical grade basis on the spot markets. And progressively we will be transitioning into multiyear supply agreements with customers. We have started conversations with.
Max Vickerson
Excellent, thank you. And then just another question on your carbonate pricing and sorry to maybe be a bit sticky here, but when you are talking about the split between battery and technical grade, excluding the Naraha feed, can I just be really clear there, is that 50-50 split taking into account what’s sort of going to Naraha? Should we assume that as you mentioned the Stage 2 technical grade is what’s going to save Naraha?
Martin Perez de Solay
So, production is about 50% technical grade 50% battery grade at the moment. Now, we are starting to supply some quantities of technical grade carbonates to Naraha in order for them to have a feedstock to process when the commissioning starts. The Olaroz Stage 2 expansion will produce technical grades, which will be the main feed to Naraha. Does that answer your question, Max?
Max Vickerson
It does. That’s great. Thank you, guys. Thank you.
Operator
Thank you. Your next question comes from the line of Lachlan Shaw from UBS. Your line is open.
Lachlan Shaw
Good morning Martin and team. Great results at the MCAT line. Well, I have just a few questions to clarify some things from my side. So, just on the Mt Cattlin downgrade, what confidence have we got with the steps you are putting in place around remediation, mobilizing additional contractors can deliver the progressive step up in production there through this FY?
Keith Muller
Good morning, Lachlan. It’s Keith. We have not only put those steps in place, it’s really operational. So, the additional mining fleet upgrade has started mining this week. And the key personnel and equipment of our second mining contractor is already on site. And they will be operational in the first week of September. In terms of confidence for the mineralogy of the rest of the ore body, we have got a number of Diamond drill core holes that we have analyzed in the upcoming ore fleet and they show no signs of fine grained ore. It is limited information in terms of core drilling, but there is about 12 holes that we have looked at in a very small area that we are mining. So, we are quite confident that the mineralogy will return to what it has been in the past.
Lachlan Shaw
Okay, great. And then just moving across to Olaroz now. So, just the enhanced recovery project, so, do you have any sort of sense or insight around timing of that, if all goes to plan? And I guess just a question, once installed, would it be an instant sort of ramp up in addition to recoveries there, or would it take some time to start getting that through?
Martin Perez de Solay
This is a chemical plant and ramp up of chemical plants and never immediately it takes time. What we are looking there is improving the recovery from the carbonation reaction and be able to transfer more lithium chloride into lithium carbonate, through a second step of stage of recovery. We are completing the technical piloting for the project. We expect to have a DFS in the first half of next year. Construction should not be very difficult. But it’s always a construction of 4,000 meters, right. So, you have to consider that. And on the back of that, it’s a simpler plants of Olaroz. But in any case, you have to remember it’s a chemical plant. So, it requires fine tuning of parameters. And also, this ramped up some other immediate. Once we have the DFS ready first half of next calendar year, we will be able to get more details around ramp ups and unexpected – how we expect to reach a maximum production from that facility. It is very – when you look at the increased production, this is basically getting more products from the same brine using the same operation ponds, it’s just adding additional value to project by improving recovery. It looks very attractive.
Lachlan Shaw
Great. Thanks Martin. And one final one, just some of the purification facility, so, is that in addition to the current circuit onsite or would that be relocating the current circuit down to Jujuy? And then just to in terms of the impact on volume for the 30% to 40% lift in technical grade production? Is that just sort of share of overall production or is that allowing Stage 1 to get towards notional nameplate of 17,500 tons per annum? Thank you.
Martin Perez de Solay
It is significantly by when you move the purification sequence to a more favorable location will get improved verification results. And we increase the throughput of Stage 1 to reach its nameplate capacity by producing 100% technical grade. And that will not only increase production of Stage 1, but will also increase production of battery grade throughout the plant because we will have more tons of technical grade to be converted into high-quality purified battery grade which is, if you remember the quality of our purified product is quite high since we run the second crystallization.
Lachlan Shaw
Got it. Thank you.
Operator
Your next question comes from the line of Matthew Frydman from MST Financial. Your line is open.
Matthew Frydman
Sure. Thanks. Good morning Martin and team. Firstly, on the Olaroz, unless I have missed it, you haven’t provided any guidance for production costs. I am guessing that maybe because you might be thinking about how you are going to incorporate the ramp up in Stage 2 over the year. But can you give us a sense of what you are expecting from Stage 1? It’s flat production and costs at Stage 1 versus FY ‘22? Is that a fair base case to consider, or anything else that we should be thinking about that might change that view, maybe the mix of technical grade production or anything else that’s going to drive cost of production versus taking FY ‘22 as the base case?
Martin Perez de Solay
Yes. Thank you for your question. And your answer is within your question. The reason why we have not provided our guidance is because we have to factor in how the ramp up of Stage 2 happens in the overall production plant. When you look at Stage 1, as you have seen we have continuously improved year-over-year the performance from Stage 1 not only increasing the quantity of battery grade, but also increasing the total throughput of the plant while keeping the costs well under control. That is going to be the case for this current financial year with regards to Olaroz Stage 1, will continue to improve. As you know, the movement between the exchange rates and the devaluation in Argentina may create some short-term movement in the costs. But in the long run costs at all our Stage 1, we will remain in similar levels of competitivity taking into consideration of increased production and increased battery grade production.
Matthew Frydman
Got it. Thanks Martin. And then secondly, maybe it’s one of the case, but the legacy stockpiled material that’s forming part of that low grade product, just wondering how much of that legacy inventory that you have. And I guess with 100,000 tons of low grade shipments, would that fully consume the remainder of what you have got in that stockpile. And then at that point, if you wanted to continue selling this low grade product, it would just be from this tailing stream. We are wondering if you can give us a sense of how much material is there? Thanks.
Christian Cortes
Thanks for the question. Once we sell this 130,000 tons that would not consume the full stockpiles that we have at the moment. Not all that material is suitable to be shipped, so we haven’t done the work to fully understand exactly how much of this sits in reserve. We have only been able to access those that we are very familiar with the quality. And we don’t want to take any risks to ship something that we do haven’t tested before.
Matthew Frydman
Got it. Thanks. And then just finally, I get another one on unrealized prices for Olaroz that you have quoted at $47 a kilo. Just wondering what assumptions in around market pricing are embedded obviously in that guidance, or maybe to put it another way, if spot prices are flat for the next three months. Can we expect an ongoing re-pricing of sales into Q2 that would be positive realized pricing relative to that guidance?
Christian Cortes
Yes. Well, Matt, this is Christian. Thanks for this question. You have probably seen that if spot prices have remained relatively flat over the last six months, the weighted average contract prices have continued to catch up and to increase. And this is what we have taken into consideration looking at the pricing formulas of our long-term supply agreements. So, we haven’t factored in dramatic increases in spot prices. We believe the market will remain tight. And we know the mechanism of our contracts allows for continued improvements.
Matthew Frydman
Got it. So, there is already some element of ongoing re-pricing obviously to get that, rating between the Q1 and Q2 in your expectation.
Christian Cortes
Yes. Great.
Matthew Frydman
Okay. Thanks very much for the question.
Operator
Your next question comes from the line of David Deckelbaum from Cowen. Your line is open.
David Deckelbaum
Thanks Martin and everyone for taking my questions this morning. I wanted to follow-up with it on the spodumene sales. It seems like implied in the guidance that you should be exiting the fiscal ‘23 year close to 50,000 tons in the fourth quarter. I know in the last update you provided us, you said that you should see growing volumes, obviously into ‘24 as head grade improves. Obviously, the back half of the ‘23 year is going to benefit a bit from some perhaps deferred sales. As we think about the trajectory, I guess into fiscal ‘24, is that 50,000 tons or more or less close to capacity is that a reasonable run rate to think about on a quarterly basis? Thank you.
Martin Perez de Solay
Sure. So, we will see the head grade return to approximately 1.04% over the life of mine. At the current nameplate capacity of the plant which is approximately a throughput of 1.8 million tons, that’s a quarterly run rate of approximately 45,000 tons to 50,000 tons of spodumene at about 5.6%. So, yes, we can expect to see around 45,000 tons to 50,000 tons each quarter going forward into FY ‘24 as well.
David Deckelbaum
Thanks for that. And then just the last one for me is just going on Olaroz. You have discussed some visions around Stage 3. Can you give us some thoughts on timing of when you would be able to speak to the market around Stage 3 plants and it sounds like you are considering incorporating the Maria Victoria tenements in there, is that accurate?
Martin Perez de Solay
Yes. Listen let’s start with the Maria Victoria tenements. It’s the agreement to swap more out for Maria Victoria gives us a great opportunity to increase our reserves and resources in the area, increasing the potential of production from Olaroz Stage 3 and it will be more brine concentrated in the same area. As I have said before, we are currently working on the technology selection for Olaroz Stage 3, including all of the Olaroz assets, Cauchari Maria Victoria and other properties that we have in the area. As we have said, we are looking into hybrid solutions here. We don’t foresee 100% DLE system. We don’t foresee our 100% of operational system. We are looking into a mix of hybrid solutions that would maximize the profitability and return on the projects as well as minimize the environmental impact and focus on sustainability in the area. As I told you before, we are piloting and testing different technical solutions. We expect to be better positioning on the technical side by the end of this year, and that will help us to get our DFS in the first half of next year.
David Deckelbaum
Appreciate that. Maybe if I could sneak in one more, since you guys are being generous allowing three questions. It was interesting to me that you brought up – yes, fair enough. In the States, we only get two, so I am going to take a third here. In your guidance for this budget on sales in the subsequent quarter, obviously, somewhere in that 20,000 ton range, you highlighted the operational issues at Mt Cattlin, and obviously the incremental volumes of the lower grade spodumene. We have read a lot in the headlines around power rationing for converters in China. I guess as you see the market today, is that something also impacting volumes or as the converter market in China is sort of being prioritized with some of the energy rationing as you see it?
Martin Perez de Solay
Yes. David thanks for bringing this issue up. It’s an interesting development, the acute drought in China, impacting the power supply. We have been in contact with our customers on almost a daily basis over the last couple of weeks. What we have heard from them so far is that it is still the lithium supply that is constraining their production, rather than the power supply. However, yesterday, one of them was talking to us under 41 degrees in his office without air conditioning. So, it is it is progressively affecting them. And we are very closely monitoring the situation. Inventories of cathodes are low in China, so basically, the tightness remains. And what we see is, this probably will further increase the interest of consumers for electric vehicles, because this historic drought in China combined with what is happening in Europe, and in North America is pushing consumers to move away from internal combustion engines into EVs. But again, to go back to the converters in China, at this stage, they are still tight in spodumene supply and asking for more material.
David Deckelbaum
That’s an interesting point. We are more constrained on feedstock than we are on energy right now. So, I appreciate the update. Thank you.
Operator
Your next question comes from the line of Ben Lyons from [indiscernible]. Your line is open.
Unidentified Analyst
Thank you. Hello, Martin. Just one question from me and it’s probably more directed at Christian. Sorry to belabor the lower grade Cattlin concentrate point, but I just like to approach this one, and question the wisdom of the marketing strategy. And to me, that essentially sounds like DSO given your resource grades 1.2% live here and your reserve grades close enough to 1% of the deposit. And you are basically selling a 1.1% product. So, if I think back a couple of years, it was sales at DSO albeit from other market participants that actually killed the cycle. And there is very few merchant vendors of concentrate at present, it’s still a highly concentrated market. So, I get that converters in China are currently short. And they will still be short next quarter, and they will still be short, the quarter after that you are selling a product at $500 or $600 at a really skinny margin. So, you compare that to selling a spec product at 10x that price. Can this material actually go through the concentrator and be upgraded, or is it essentially waste that you are just dipping into the market and probably impacting the price of your other products at the moment? Thank you.
Christian Cortes
Yes. Thanks for your question, Ben. This is not DSO, very clearly this is not – we are not shipping ore that we mine. This product is a combination of waste material and a product stream that has gone through the plant. And that could not be upgraded into SC6. So, we have actually developed a lower-grade product, which is a good way to supplement our SC6 production, but would not otherwise become SC6 in our own product stream. Our current head grade is below 1.1%, because of the geology of the pit we are mining at the moment. And the products that we are going to – we are currently selling this lower grade spodumene concentrate, is of different grades, but the range is probably between 1.1% and 1.3% at the moment. And we are getting credit for every 1.1% grade above what the agreed price with our customers.
Martin Perez de Solay
And this is Martin to complement Christian’s answer. This is not a long-term strategy. This is a solution that we are putting together with the final recession products that we are processing through the plants and finding a way to support our customers through a difficult cycle. If we had other assets equals explaining, shall we have other old sources that would enable us to produce SC6, we wouldn’t be doing that. It’s not a change in the strategy at all. It’s a short-term solution to support customers and minimize the impact of the short-term problem that we found in the upper layer at Mt Cattlin in this quarter. Is it clear?
Unidentified Analyst
Yes, it is. Thanks very much for your response.
Operator
Presenters, your final question today comes from the line of Al Harvey from JPMorgan. Your line is open.
Al Harvey
Thanks for the follow-up guys. Really just still want to get on top of this, the low grade product. You have called it s SC like a kind of like an SC6 equivalent. But is the mineralogy actually spodumene? Is it a diluted spodumene or is it kind of a stream that’s coming from mica materials or the pidilites, if you can provide any color there that would be helpful?
Keith Muller
It’s Keith here. Yes, it is indeed a spodumene product. It is fine grained spodumene. So, the ability to process this in your typical DMS setup is diminished. However, with flotation or other processing technology, you would be able to beneficiate this fine-grained material. So, short answer is yes, its still spodumene.
Al Harvey
Thanks.
Operator
There are no further questions at this time. I would like to hand back over to Martin to complete the call.
Martin Perez de Solay
Thank you very much. Thank you everybody for joining the call. Very sensitive built-in remark for us today is 1 year since we announced the merger between Galaxy and Orocobre. As you know, it has been a challenging, but quite rewarding year for all of us. And the merger has proved that together we did better than both companies would have done independently. This is the road that we continue to go ahead as our motto says, together we go further. Thank you very much for all of your support during this particular year and we share with you the happiness of our first anniversary. Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
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Allkem Limited (OROCF) CEO Martin Perez de Solay on Q4 2022 Results - Earnings Call Transcript