2023-04-20 01:22:04 ET
Allkem Limited (OROCF)
Q3 2023 Earnings Conference Call
April 19, 2023, 08:00 PM ET
Company Participants
Martin Perez de Solay - MD and CEO
Christian Barbier - Chief Sales and Marketing Officer
James Connolly - Chief Project Development Officer
Christian Cortes - Acting CFO
Liam Franklyn - Head, Australian Operations
Conference Call Participants
Tom Hays - CLSA
Mitch Ryan - Jefferies
Al Harvey - JPMorgan
Hugo Nicolaci - Goldman Sachs
Kaan Peker - RBC Capital Markets
Reg Spencer - Canaccord Genuity
Hayden Bairstow - Macquarie
Rahul Anand - Morgan Stanley Australia
Lachlan Shaw - UBS
Glyn Lawcock - Barrenjoey
Presentation
Operator
Good day and welcome to the Allkem Limited March Quarterly Results Briefing Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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'd now like to welcome Martin Perez de Solay, Managing Director and CEO to begin the conference. Martin over to you.
Martin Perez de Solay
Thank you, Gavin. Welcome, everybody. And thank you for joining us for Allkem's March quarterly results briefing. As usual, I will be providing an update on our business and Christian Barbier, Chief Sales and Marketing Officer will be providing us with a market update. Also joining us for the Q&A is James Connolly, our Chief Product Development Officer; Liam Franklyn, Head of Marketing Operations and Christian Cortes, our acting CFO.
Firstly, the global lithium markets remain very robust, despite temporary softness in the Chinese market. We continue to focus on our long-term strategy and remain fully committed to the delivery and execution of our growth pipeline.
This quarter, we have achieved an excellent operational performance. We continue to produce consistent and quality product at all levels achieving record production for March quarter. At Mt Cattlin, we have successfully increased our production volumes by 2.3 times compared to the last quarter in line with guidance. Across the portfolio we have made solid development in project execution. In Argentina, we have successfully reached over 98.2% completion at all our Stage 2. We have also advanced the first two strings of ponds to over 90% completion at Sal de Vida. In Canada, we received further approval for the James Bay ESIA and in Japan we continue to produce high quality hydroxide.
We have also seen a lot of advancements in our lithium resources. We've increased the order of resource by 27% increase the measured and indicated categories of Mt Cattlin resource to support future life extension. And we have completed 29,000 meters of drilling at James Bay, which also inform a resource update.
We continue to be in an extremely strong financial position. This quarter we generated group revenue of approximately $315 million a 19% improvement from the prior quarter. We also achieve significant group cash operating margins of 85%.
Group net cash at the end of the quarter was approximately $578 million, and our teams remain focused on advancing the development of our project pipeline, as we are very clearly set out to triple production by 2026.
Firstly, I'm starting with sustainability the core pillar of our business we continue to be recognized for our leading practices. During the quarter all Allkem was included in the 2023 edition of the S&P Global Sustainability Yearbook. This means our corporate sustainability assessment score is in the top 15% of the industry. Allkem recorded a 12-month moving average TRIFR of 1.72 at the end of March a 9% improvement quarter-over-quarter. Unfortunately, we did incur four recordable injuries during the quarter to at Mt Cattlin and Sal de Vida. Investigations have been carried out and effective corrective actions have now been implemented.
As part of our net zero commitment, we have identified six projects that are now being further evaluated for inclusion in our netview action plan. We also progressed our environmental plants at the James Bay project in line with our recently approved ESIA and continue to undertake share value initiatives in our local communities.
Moving on to our operations, our total production for the March quarter was over 4,100 tons, up 38% on the previous corresponding period, approximately 65% of production was technical grade. Strong operating performance continues with excellent plant reliability, low downtime and improved energy efficiency. Lithium carbonate sales were over 2,900 tones, generating record revenue of $159 million with a gross cash margin of 91%. Excluding shipments to Naraha third-party sales were completed at $53,175 per ton FOB, which is slightly above initial guidance. By the end of March, all our Stage 2 expansion had reached an overall physical progress of approximately 98.2%. All evaporation ponds, lime plants, soda ash handling and infrastructure are complete.
All activities in the carbonation plant are progressing to plan and we are focused on commissioning the subsistence of the plant and completing final electromechanics. Commissioning activities are underway, progressing for the June quarter for the planned first production.
During the quarter we have also increased the mineral resource by 27% to 20.7 million tonnes of LCE. The combined 27 million tonne resource across Naraha and Cauchari [ph] supports future material expansion of production, and will be the basis for the Olaroz Stage 3 Cauchari expansion studies currently underway.
In Mt Cattlin, during the quarter over 38,112 metric tons of spodumene concentrate was produced at 5.3% lithium oxide grade, in line with last guidance of 80,000 to 90,000 tonnes of production for this June half. Recovery of 60% demonstrates significant improvement in grade and favorable mineralization as mining moves to the more central sounds of the main ore body.
We shipped over 21,500 tons of spodumene concentrate and generated revenues of $123 million. Gross margin of 81% was based on cost of production on average pricing of $5,702 per metric ton. An additional $33 million of revenue were generated from the sales of over 54,000 tons of low grade spodumene concentrate. Customer demand in the spodumene market remains robust and pricing in the June quarter is expected to be approximately 5,000 tons of dry metric tons CIF of SC6.
We also recently updated resource for Mt. Cattlin and 90% of the resource has now been upgraded to Measured and Indicated. Further diamond drilling has been completed to support the life of mine extension study. This study will aim to inform approvals and design both open cut and underground options.
At Naraha, since first production of lithium hydroxide in late October, continue to produce good quality lithium hydroxide chemicals confirming the success of our technology. During the quarter, about 670 tons of technical grade lithium hydroxide were sold to third party customers. We continue to focus on progressively increasing the product quality and consistency to allow commencement of customer acceptance testings.
At Sal de Vida, the construction of the first two strings of ponds reached over 90% completion with a first eight ponds completed and filled with brine. The main brine pipeline is completed and eight out of ten production wells have been commissioned.
Camp expansion activities and procurement from long lead items continue. Detailed engineering on the process plants have progressed to 40% and completion and mobilization and delivery of precast foundations is occurring. As I have detailed, many areas of the projects are well advanced. However, we have identified that resource and procurement issues may potentially cause delays with the completion of a lithium carbonate plant. We're liaising with our prime contractor and suppliers to mitigate the impact on planned completion date and will advise any changes to schedule once the work is completed.
At James Bay, now that we have obtained federal approval for the James Bay, ESIA. We are focused on the provincial approval which remains in progress. Engagement with the community and government stakeholders continue to be very positive. We are advancing the project on a number of fronts in preparation for construction commencement as soon as we receive final permitting.
Work is ongoing with engineering constructors to evaluate opportunities to accelerate the construction schedule, including the use of prefabricated modules. Engineering work 65% complete by the end of the quarter with a process plan package at 79% completion. Procurement of mechanical process equipment, electrical equipment, and mine mobile equipment are all over 82% complete.
On site Hydro-Quebec has successfully completed the installation of the power line to connect Hydropower 2 site. The drilling program in site was extended into April to take advantage of favorable weather conditions and high productivity. We have drilled 29,000 meters, and our resource update is underway.
I will now hand over to Christian Barbier, who will provide us the sales and marketing update.
Christian Barbier
Thank you, Martin and good morning, everyone. Firstly, many of those following the lithium markets have observed increased volatility over the last few months, with highly publicized falls in domestic Chinese lithium spot pricing. This has triggered concerns among some market watchers and participants that demand within the EV battery supply chain would be faltering. It is not.
Despite this noise, EV sales have continued to grow strongly year-on-year over the past quarter. China EV unit sales increased 30% month-on-month in March, up 24% year-on-year. The U.S. and key European economies have also grown materially, up 62% and 21% year-on-year respectively for EV sales.
The first quarter of the calendar year is always the low activity points of the year, when the Chinese New Year holiday is the opportunity for lithium processors and battery makers to schedule maintenance stoppages. This has happened in January and in February and activity has been picking up since. Based on our discussions with the supply chain, the consensus is there's confidence in continued improvements in demand over the short to medium term. An overall forecast for the 2023 calendar year remained unchanged in EV, battery and cathode sales volume.
Government policies announced throughout the globe continue to support ongoing strength in the EV demand through the next decade. I give a special mention to the clean vehicle credit under the Inflation Reduction Act and the Infrastructure Bill of the United States. This legislation reduces Evie costs by up to $7,500 per car through to 2032 but also ensures supportive charging infrastructure becomes widely available.
In addition, the U.S. Environmental Protection Agency has also announced new emissions rule which are projected to results in an EV market share of 60% by 2030 and 67% by 2032. Such initiatives will ensure that the future of U.S. transportation is on track to be cleaner and more affordable than ever before.
In closing, I reiterate the demand fundamentals remain strong and Allkem is well positioned. Despite the tumultuous Chinese spot price environment in the last three months, we've been able to maintain our prices slightly above the guidance levels, and they will continue to show resilience with our Q4 price guidance of $42,000 for carbonates. We remain confident that 2023 will be another strong year for Allkem and the lithium markets.
Thank you. I will now hand back to Martin.
Martin Perez de Solay
Thank you, Christian. And I will now hand back to the operator to commence the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question comes a line of Tom Hays from CLSA. Your line is open.
Tom Hays
Hi, team. Thank you. Thank you for the update. First question just on James Bay, you mentioned the two public hearing sessions. Just wondering if there was any sort of key focus or key issues that have been the focus of those public hearings that may be causing delay to the schedule?
Martin Perez de Solay
Thank you, Tom. No, there wasn't any particular thing that cost days to the process. There weren't many comments in the public hearings and the project is very well accepted and received by the communities. Questions from both federal and the provincial level were very similar and no surprises in there. So we are completing final stages of the approval process. Now we did went back for the final approval after a public hearing to the COMEX, which is a joint body between the Cree Nation and the Provincial Government Committee.
Tom Hays
Thank you very much. And I just follow up on one just about the general environment in Argentina. Appreciating that where we're moving towards primaries in August and the federal election in October. And noting that, Argentina is going through one of their worst droughts on history. I'm just wondering if you can see any potential delays or impact on your Argentine operations.
Christian Barbier
I'll tell you, clearly not in our Stage 2. All of the equipment has arrived on site, and we're finalizing electromechanical installation so that project is not subject to the delayed.
With regards to Sal de Vida, we are factoring in all those issues into our rebasing that that we're doing for the study. We don't expect anything material, but we are seeing other companies that are starting to suffer problems to bring imports into the country. It hasn't been our case so far, have been able to procure everything that we need for our Stage 2. And so far everything that we need for Sal de Vida on time.
Tom Hays
Thank you very much. I'll jump back in the queue.
Operator
Your next question comes from the line of Mitch Ryan from Jeffries. Your line is open.
Mitch Ryan
Good morning. Thank you very much for taking my question. My first question is with regards to I guess the market dynamics. And you told us in carbonate during the quarter, why they ship a low grade sputtering concentrate product during the quarter and contribute to potential market oversupply.
Martin Perez de Solay
Let me hand over the question to Christian Barbier.
Christian Barbier
Yes, Mitch. Thanks for the question. Look, we said early on that we would start shipping low grades to our customers, while spodumene sales were affected by the quality of the ore mine in Mt Cattlin. So we've been continuing to do these during the March quarter. It's a by-product, again of our production that we can't concentrate further. We've taken advantage of high market prices. However, at the moment, as spodumene production has recovered in Mt Cattlin, which is excellent use, there's no needs to continue much further. So it's not about market balance. It really is to supply our customers, or it was to supply our customers the links in the units that they were counting on to our spodumene supply.
Mitch Ryan
Okay, thank you very much for the color. My second question relates to the Sal de Vida. You've sort of called out that you're experiencing resourcing and procurement issues. What improvements are you assuming are required to meet the current guidance?
Martin Perez de Solay
We're currently working -- well thank you for your second question. But we're currently working on an expedited delivery of some equipment to make sure that we minimize whatever impact on on the completion date we could have as a consequence of what we said before potential issues with input equipment and access to resources given a situation but, James, you may give some more color on that. James, you're not coming through the line.
James Connolly
During the baselining exercise, we are testing environments where we could look at alternatives to preserve schedule, that's both on the procurement front as well as on productivity and people front. So it's a bit of both really, so this is not material slippage that you're seeing. It's us trying to keep to our word, and we will do the unnecessary analysis before we revise guidance in this instance.
Mitch Ryan
Okay. Thank you for the color.
Operator
Question comes from the line of Matthew Friedman [ph] of MSC Financial. Your line is open.
Unidentified Analyst
Sure, thanks. Hi, Martin and team. My first question is just on your carbonate sales during the quarter, and also the previous quarter. In fact, you've built over 2,300 tons of product inventory over the last two quarters during probably the two strongest quarters of price on record. So looking forward, just wondering how do you think about getting this product into the market at the right price? Are you able to increase deliveries into your offtake customers at prices that are higher than spot prices? Or is the strategy to wait until the spot market is more supportive in order to move this product? Just wondering I guess what the thinking is around that inventory build.
Martin Perez de Solay
Thank you much for your question. Christian, can give you some color on that, please.
Christian Barbier
Yes, Matthew. We explained during the last quarter, I think that yes, we have an inventory build at the end of the December quarter which has been maintained during the March quarter. The reason being that we had put aside in quantity of carbonate for the startup of Naraha. And the production in Naraha has been a little bit less than what was expected for actually an excellent reason is that some adjustments in production have been made to increase very quickly the quality of the product.
We expect that during the June quarter, we'll be able to start the qualification process for our battery grade hydroxide, which is, which is great news. But as a result of this, they have actually consumed a little bit less carbonate. And we've had also excellent operational performance, a lot of us as you've seen over the last two quarters, records production numbers, which is also great news.
So our sales to customers on track and going according to forecast. We will be able to place those volumes when the time is right, we're not pushing volumes into the Chinese spot markets for carbonate, which as you know, is the biggest pot market for carbonate in the world. We're not pushing these stones at the moment because prices are not representative of the medium term value that we should be able to get for this product.
Unidentified Analyst
Okay, thanks very much Christian, maybe following up on that, given that you've attributed a large chunk of that inventory built in Naraha. You mentioned during the quarter you produced 600 minerals or you sold 670 tons of technical grade lithium hydroxide. Just wondering is that material currently generating positive cash margins, I guess particularly in the context of the very large spread at the moment, as you'd be aware between technical grade carbonate products and battery grade hydroxide products. Just wondering how material the raw has, earnings and cash generation can be in the coming quarters and when you might expect Naraha range commercial production.
Martin Perez de Solay
Thank you so much for that. Yeah, just confirming production, half of the quarter was about 1,100 tons. And Christian can confirm you the -- the cash results of the operation at Naraha and what we're expecting from it.
Christian Barbier
Christian you're not coming through the line.
Christian Cortes
Hi, Martin. Can you guys hear me now? Okay. The question with regards to Naraha, I guess, cash flow position as well as profitability. Currently, as we all know, we are in the process of ramping up and stabilizing production. The quarter was cashflow positive, when we're effectively looking at the production costs associated with the cash received from the sales from -- the sales orders that we reported on. From here on it will really come back to scaling up. So our expectation is that as those volumes are the sales volumes particularly continuing to increase in the coming months the cash generation will start flowing through the business.
Unidentified Analyst
Okay, thanks Christian. Any fixed of sort of date or idea on commercial production?
Martin Perez de Solay
We are initiating work we are getting final lab tests, and we're planning to initiate the acceptance testing with our customers during the month of May.
Unidentified Analyst
Okay, thanks very much for taking my questions on.
Operator
Your next question comes from the line of Al Harvey of JPMorgan. Your line is open.
Al Harvey
Good morning team. Would you just be able to repeat the battery grade split of carbonate production and sales and perhaps talk through where premiums are sitting for battery grade carbonate against industrial grade at the moment? Or I guess in a related related manner, just what split of battery grades as the $42,000 a ton guidance imply?
Martin Perez de Solay
Thank you very much, Al for your question. The production split test was 65% technical, 35% prime --purified for the quarter. And Christian, can you comment on the premiums, please?
Christian Cortes
Yeah. Thanks for the question. Really, in our sales performance, the distinction between technical grade and battery grade is not very relevant, because the price difference results more from the type of contracts that we have in terms of size and formula, rather than from the quality difference between technical grade and battery grade. So it would be, it would be a little bit misleading to try to differentiate and speculate a price depending on the on the ratio we have between battery grade and technical grade.
The spread has increased in China, because as you know, as prices continued to decrease after Chinese New Year. But again, these are spot Chinese prices, which are not representative of all lithium price transaction. And as you've seen, our own weighted average price that has maintained -- has remained stable during the quarter, slightly above the guidance. We do have a degree of lag built in our pricing system. We expect a lower price in June as we've guided because all market prices have dropped including contract indices. But again, nowhere near the price level is equal in China.
Martin Perez de Solay
And sales were about 40% battery grade is the right question for the quarter.
Christian Cortes
Yes, that's correct.
Al Harvey
Great, thanks, guys. And just another quick follow up. Can you just remind us at a high level of your geographic split? I mean, I guess, key focus being what the exposure of your volumes is to China?
Christian Cortes
Yeah, so our spodumene sales are going to China. This is the main spodumene conversion markets at the moment. And our carbonate sales are split mostly between Korea, Japan and China.
Al Harvey
Right and not willing to put a percentage on the on the China split there for the carbonate?
Christian Cortes
What I can tell you Al, is that over the last of months, sales to China have been lower than what they used to be in terms of percentage and in terms of ratio.
Al Harvey
Great. Thanks, guys, I'll queue up again.
Christian Cortes
Thank you.
Operator
Your next question comes from a line of Hugo Nicolaci from Goldman Sachs. Your line is open.
Hugo Nicolaci
Good morning, team. Thanks for the updates. Just wanted a quick follow up. Firstly, around Sal de Vida around the resourcing and procurement issues for the carbonation plant. Noting Rio is looking to similar issues that were encountered this morning as well. I was wondering if you'd go into a bit more detail around what pieces of equipment facing those procurement issues? And then maybe if you could give them some broader comments around labor availability, and if that's being impacted by having multiple projects running at the same time in Argentina, thanks.
Martin Perez de Solay
As I said before, we are fluctuating the things while we're analysis we're working on expediting the procurement of electrical equipment, which in the case of [indiscernible] was one that took the longer time to get to site. And we've already started some of the proprietary equipment like filter process on Earth flat tests. So on that side, we're well but we're looking into these potential delays that may come from pressure from lots of projects being built in the same place inputs into the country and some delays which we have already experienced in our delivery of electrical equipment.
Not a lot more detail until we complete and we get new estimates on delivery on those things. But James can give you some more details on that. I think it's pretty much what I answered before.
James Connolly
Yeah, 100% of the pressure is not too much on that mechanical equipment, most of the gears in the in fabrication and some of it coming out of FAT. So, good progress on that side, we're pleased with it. A couple of smaller packages that we're working through on that side. But as Martin said, just want to make sure that our electrical systems and subpackages make sense with our schedule so that we do not have to come back and restate guidance, we want to be a shop that you can count on. So we're going to do this work, we're going to see what we can do and make sure we come back with a defensible schedule.
Hugo Nicolaci
That's great. Thanks for that clarification. My second one, then just around pricing detail, a bit of a follow up there. It talked to the ex-China pricing indices holding up. I guess, maybe your higher level views on how that plays out on the next three to six months. Do you expect some degree of convergence still from your ex-China indices? And you know how far you expect those to converge versus the declines in the China indices. Thanks.
Martin Perez de Solay
Christian, please.
Christian Barbier
Yeah. So yeah. Look, again, we've been talking about what we hear a lot in the narrative is about Chinese spot prices. In fact, the EV market in China is very dynamic. And there is a fight for market share, as we've reported in the past between OEMs. There is also discounts on AC vehicles that don't meet the Chinese rules from July onwards. That has impacted consumer behavior in the beginning. But now they've return to a steady purchasing behavior. And the Chinese government is very strongly invested on accelerating the EV sales transition in China. So I'm saying this as an introduction, because fundamentals remain very positive for lithium market growth as well as actually inventories and profitability.
So there's a lot of noise about the Chinese lithium price, but despite this, and you've probably heard some trading platforms in China have actually reported rebounding in prices. Again, these are not representative of markets transactions. These are representative of market sentiment. And we all know that the Chinese market which drives a lot of this, but especially carbonate prices, is extremely driven by sentiment.
So I'm not going to give you forecasts for prices. But I certainly see that the underlying fundamentals for demand are strong. And there's probably been a number of players that have skewed the narrative over the last quarter in order to get -- to put pressure on their suppliers. However, at the moment, what we see is certainly some people that are getting ready to place orders again during this June quarter, as downstream inventories are fairly low across the supply chain.
Hugo Nicolaci
Great, thanks for additional color. Jump back in the queue. Thanks.
Operator
Your next question comes from the line of Kaan Peker of RBC. Your line is open.
Kaan Peker
Good morning, Martin and team. Thanks for the update. A few questions on Mt Cattlin. I think in the resource update released recently, it's actually based on a reserve recovery rate of 75%. Is this what you're going to be using for your reserve study?
Martin Perez de Solay
Yes, that's that reserve report is the basis for our study.
Kaan Peker
Given that's having struggling to get of 60%.
Martin Perez de Solay
Liam, do you want to add some more color on that?
Liam Franklyn
Specifically ore recovery or plant recovery.
Kaan Peker
Overall recovery plant recovery?
Liam Franklyn
Plant recovery won't be in the range of the 75%, that may be alluding to an ore recovery number and plant recovery will be in norm with historical norms and the modeling that we expect from the ore grade that we that's coming through.
Kaan Peker
Sure thanks. And maybe, secondly on Mt. Cattlin. And it looks like the expanded plant pit will be actually quite significant because that impact any existing infrastructure when it's expanded the plant repairing roadways. And does that play into the thinking of developing the underground, please?
Liam Franklyn
Yeah, look, that is a really good question Kaan. That is providing, I guess, a nominal boundary for where we are thinking of the logical tipping point to an underground operation with the studies that we're looking at. It doesn't necessarily mean that that's going to limit a continuation of further cutbacks. However, it is coming into thinking in terms of the trade off when it comes to coming up against infrastructure. At the moment, the current study we're looking at for the next phase of the mine is not being impacted by infrastructure.
Kaan Peker
That's the 1,100 ton pit shell.
Liam Franklyn
The pit shell, yes.
Kaan Peker
Thank you. I'll pass it on. And circle back. Thanks.
Operator
Your next question comes from Reg Spencer of Canaccord Genuity. Your line is open.
Reg Spencer
Thanks, good morning, everyone. Martin, just question back to Sal de Vida. The factors that have driven to this delay [indiscernible] are these specific to Sal de Vida itself or might they be more widespread? Could other development projects in Argentina be going through the same thing?
Martin Perez de Solay
Right, so difficult to talk about other projects, Reg. We are seeing this, we have seen these issues in this supply chain long electrical equipment, issues to bring products into Argentina that other projects has recently faced and you see that some labor restrictions up in the area, which we're trying to work in advance to minimize impacts on the timeline. We're looking at them how would they impact Sal de Vida and I cannot tell you how they impact other projects.
Reg Spencer
Understood. Thanks so much. And then just last one maybe for Christian. Thinking about the pricing differential between the different products and the different markets every week. A lot of investors seem to be fixated on spot prices. But how much flexibility do we have in the customer contracts and production base to be able to capitalize on something differential, rather disappointing [ph] some employee impact [indiscernible] bid in the coming periods, and in coming years is the how rachet up. So for example, will you have the ability to shift product volumes into markets where you get the best pricing?
Martin Perez de Solay
That's precisely the core of our strategy, having this availability of products and flexibility across budget grade, technical grade and hydroxide that enabled us to serve all our customers and maximize the profitability from the product we produce. The good results of the Nahara plant from a technical point of view and able to think as to think of more Nahara-type facilities around the world, and the ability to grow production.
If you've seen the results upgrade from all our ability to go into a factory in Nova Scotia [ph] as well as Stage 2 in Sal de Vida will provide us with a large amount of product and with the technology that we got working in Naraha, and now we can easily replicate that and be a company with an ability to supply globally to our customers.
We operate in four countries that are fully democratic countries, and are within the buffer supply chain geographic or Europe and North America and this trend reshoring concept that we have seen lately. And we have the technology and the ability to be flexible and maximize profitability. So that's what we are doing and you're saying that that you've seen that throughout the life of our projects, how we will increase the quality of the products and how you're seeing a significant increase in flexibility.
Reg Spencer
Thanks a lot. So obviously, as time goes on your production base grows your ability and efforts they will grow along with that. So that's useful. Thanks very much. I'll pass it on.
Martin Perez de Solay
Thank you, Reg.
Operator
Your next question comes from line of Hayden Bairstow of Macquarie. Your line is open.
Hayden Bairstow
Yeah, hi guys. Just a couple from me. Firstly, just on Argentina, there's been a bit of commentary around that. But just in the lead up to these elections, do you think there's any concern from your end about discussions on potential tax and royalty changes in the country, just given how debt inflation is going and how weak the currency is now moving? Do you think that that becomes a key election issue that we might see some noise around?
Martin Perez de Solay
Well, every time there's an election in Argentina, you'll see noise around many things. Unfortunately, it's a lot of noise around things. We don't expect any change in the regime, we just saw the reduction of the subsidies for the production of lithium. And, there's not agreement between the national government and the different provinces to go through any different changes. You hear lots of noises, but the central point around the elections and the campaign is how to reduce inflation, that is costing a lot to the people, more than other things that I do not expect.
We are currently producing dollar for the country with the export that we generate. We are supporting the growth of the country and the country needs that. And we are seeing that support from the government. As a matter of fact, I saw a report from the government in which we have been the second exporter from Argentina during 2022 in minerals. So it's an important project for the country.
Hayden Bairstow
Okay, great. And then just on the price guidance of 42,000. Can you just reconfirm again, sort of what was the implied mix of technical versus battery grade at that? And I know them the Naraha volumes are small, but what sort of hydroxide price premium should we factor in to whatever sales you can get out of the Naraha?
Martin Perez de Solay
I will shift that question to Christian, but I will tell you I wouldn't expect a significant change from where we are because it's mostly contracted.
Christian Barbier
Yeah, that's correct, Martin. And on the carbonate sales price here, you can expect that similar mix to what we've had in the last quarter. Again, there's a lag in our pricing systems, we have different formulas. And the impact on various indices explains the guidance that we've put forward. In terms of hydroxide sales, at the moment the product is sold on the technical grade as a spot, we are producing battery grade hydroxide.
Again, this is great news, the improvements that have been made in the plant, we will sell that spots once the technical qualification has been initiated, it's a long qualification process for hydroxide as you probably know and we will get the benefit of stronger hydroxide prices than currently government prices are.
Hayden Bairstow
Less normally a six month process right? So what you won't see that in this quarter?
Christian Barbier
So we don't report the hydroxide prices as we do our carbonate prices, because of the consolidations -- type of consolidation. Maybe Christian Cortes can comment on this. So you don't see the same way now in our accounts.
Hayden Bairstow
Okay, thanks.
Operator
Comes from the line of Rahul Anand from Morgan Stanley Australia. Your line is open.
Rahul Anand
Hi, good morning team. First one is for Martin and then the second one for Christian. So first one, look, at Stage 1 production, I think everyone's missed that you're already clocking above, sort of 15 and you're actually at about 15,500 tons per annum now. And this third quarter was pretty much the highest third quarter, at least I've seen in terms of the assets' history. So I guess two questions there for you, Martin in terms of the future of the asset. Obviously in the past, you've talked about how medium term you can probably only do 15,000 tons per annum at the asset. You're probably going to breach that this year. How should we think about the future years? Are we starting to see production levels now that start taking us towards that nameplate of 17.5? And I'll come back with a second one. Thanks.
Martin Perez de Solay
Thank you, Rahul for your question. Listen, I think that we're coming to medium term from when I said that. It is material, I think what we said was going to be this, trees don't grow to the sky, there's a limit, obviously. And the production from all that we're seeing is very good. Stage 1 is approaching that the nameplate capacity. Obviously, we would be overwhelmed producing 100% battery, technical grade, but the battery grade, as you know, reduces the production of the plant.
So, now the future for our Stage 2, and the projects that we have to enhance recovery through mother liquor reprocessing, and the project of bringing purified [indiscernible] at sea level that that would imply an improved efficiency from Nahara Stage 1. But, as you said, we're approaching that number if it was 100% technical, we would be there. And now, the focus is Stage 2.
Rahul Anand
Yeah, yeah. Just one quick follow up in terms of the final brine inventories in grade. Are the inventory still at normal levels? There has been no sort of extra drawdown per se to have that strong production this quarter. And then in terms of brine concentration, still running in that sort of sweet spot, I guess for the plant
Martin Perez de Solay
With a lot larger inventory of brine, because we have all the points ready to start Stage 2. We have been able to maintain that sweet spot for a longer time. So there wasn't been we haven't had a larger drainage to increase production capacity. It was also we have been favored by with weather in the summer period, rains were lower than they were last year. But nonetheless, the way we're managing the plant now basically factors out minimizes the impact of any climate. So there are too many things contributing. The largest one I will tell you the larger amount of evaporation area and larger brine inventory, being getting ready for Stage 2 enabled us to extend the sweet spot.
Rahul Anand
Perfect, thank you. Second one for Christian on pricing. Christian, I think it's been talked about a fair bit already, I don't want to labor the point too much. But I just wanted to understand in terms of pricing contracts, obviously, you're flagging a $5,000 a ton spot price going forward for the next quarter, which seems to be higher than where Chinese spot is at least. And then if we talk about the carbonate prices, they seem to be at $42,000, which is a bit below where I can see the South American price being at in terms of the carbonate.
So I guess my question is more around the structure of some of the contracts. How much flexibility is there in these guidance numbers in terms of how the prices move, both for spodumene and for carbonate, i.e., you know, can we see some volatility to these numbers? Or are these prices largely locked in? That's first part.
And then the second part is if you were to run to the spot numbers in these two estimates, how would that number look like then? Thanks.
Christian Barbier
Thanks. Well, that's a long question. So, look for the spodumene first, actually, if you look at contract pricing indices for spodumene, you will see that the current level is around the fact that and guidance that we've given ourselves. And again, this is a measure of the problem in markets, which has not suffered as much as the carbonate market. The main reason is that spodumene feeds into hydroxide. And there's been a continued demand for lithium hydroxide, especially outside China for high nickel battery requirements.
Regarding the carbonate sales, I'm not sure what pricing you're looking at out of Argentina. This is a weighted average price for the different grades that we have the different contracts that that we have. There is always the possibility of some adjustments due to, I mean, whatever may happen in the market, but if we've providing a guidance, it's that we have a fairly high level of confidence in the field that we provide. Flexibility to adjust. Look, a lot of the volumes that we have, that we have in our pipeline are already contracted. So again, unless any major change happens with our customers, we don't see much reason to review this.
Does that answer your question?
Rahul Anand
Yes, it does. Just one final part of that question. Apologies. I know, that was a pretty long question. Was that if you were to do your calculations as of today, given if you were thinking about sort of, perhaps first quarter of FY'24. Would there be much of a movement in terms of where you've guided for this quarter, i.e., how much of a rollover, do you have beyond the three, three-month lag, I guess?
Christian Barbier
Yeah, look, we're not getting beyond this June, quarter. Maybe. Right. And again, there's a lot of noise at the moment regarding the Chinese spot prices. I think what is important is to look at the strong market trend fundamentals. And I mentioned already EV sales being very strong in the world, in my opening comments in China, also in the U.S. And even in Europe, which is going through slower economic periods, EV sales continue to grow.
On the topic of inventories, what's interesting is that downstream inventories now from our customers we hear that they counted days for battery makers and in a couple of weeks for cathode makers. So that gives you a sense of what downstream inventories are. And it kind of makes sense because these people have been buying minimum quantities over the last three to four months. So there's more inventories upstream with converters and producers, but probably these would be around a couple of months of supply, possibly two and a half months of supply.
And again, this is measuring this in terms of months of past supply. But when you look at a growing market, if you express this in months of future supply, the inventories are lower. Again, we're talking about 30% to 35% increase year-on-year for EV sales growth this year, and that will impact the whole industry.
So we see a number of buyers now thinking they need to restock. This may create again an opposite wind of buying panic, which would be unnecessary noise across the supply chain again in the other direction. What matters is the steady market fundamentals for the next 10 years. And this -- there's always this view and the seasonal pattern that the second half of the year is significantly stronger. That's the first half of the year. We did nothing today that tells us it should be otherwise. And again, market fundamentals, which we see them very healthy.
Rahul Anand
That's very helpful. Thank you so much for that question. And Martin, thank you. I'll pass it on.
Operator
Your next question comes from line of Lachlan Shaw of UBS. Your line is open.
Lachlan Shaw
Good morning, Martin, Christian thanks very much for the update. A couple questions from me. First one maybe on markets. So just in terms of your conversations with customers and industry, are you hearing of Chinese carbonate inventory trying to get out of China and be processed into hydroxide in for example, Korea or Japan?
Martin Perez de Solay
Christian you talk to the customers all the time.
Christian Barbier
Yeah, look what is happening and it is not new is an important part of Chinese actually most of the Chinese hydroxide production is exported to Korea and Japan. Carbonate sales, carbonate production remains in Japan, they're in -- in China, there is not a huge capacity of conversion from government to hydroxide in Korea and Japan. And I believe this capacity is already supplied by existing supply contracts. So no, we have not heard that over spot shipments. Significant --
Lachlan Shaw
So just to confirm then in terms of that build of inventory of chemical of Chinese converters, so the way that resolves is, EV sales and battery production has to lift in China. Is that the only way that resolves?
Christian Barbier
Yeah, well look, again, I think it's important to put everything in perspective. The inventories, six months ago were extremely low, probably non-existent in China across the supply chain, it was a hand to the in the supply chain. Inventories have built up but if you think now that they are around two and a half months of production, this is a normal in the automotive industry, all component makers have across their supply chain about three months worth of inventory.
And this is a supply chain that is relatively complex in terms of the various processing steps but also geographically diverse. And even if you add the critical mineral, geopolitical context, this is actually a fairly normal level of inventory, probably a bit more skewed upstream than downstream. But again, this is something that is typical from the automotive industry.
Lachlan Shaw
Got it. I understood, thank you. Second question, so just James Bay by obviously a lot of activity there, resource drilling, and then across the border, IRA, et cetera. You just update us, perhaps Martin on the thinking about the roadmap for mid and downstream at James Bay? Thank you.
Martin Perez de Solay
Yeah. As I said before, we think that James Bay has a tremendous potential to go downstream and supply hydroxide into the U.S. market, considering IRA and the expected growth of demand in the market. James is currently conducting a prefeasibility study for a downstream facility in James Bay.
Lachlan Shaw
Right, and is that something that you'd look to yourself or JV with someone who's perhaps got experience in Downstream facilities?
Martin Perez de Solay
Listen, we're looking into all of the options. We are very experienced on the chemical side of the downstream. And we're looking into options on the first on the cultivation side. But that is what we -- that's why we're doing a DFS to look into all possible opportunities and make sure that we do the best project with the highest return on the lowest possible risk.
Lachlan Shaw
Understood. Thank you, Martin. Thanks again.
Operator
Your next question comes from Glyn Lawcock of Barrenjoey. Your line is open.
Glyn Lawcock
Good morning, Martin. Look, I'm unfortunately going to ask another pricing question. But look, I'm just curious, you hope you held back some volume, because you said the price was low in China. If I look at the prices in China relative to a couple of years ago, when we were happily selling, they're actually still well above. And they're still well above what the market is imputing for long-term prices, what the brokers users consensus.
So is there any issues around placing the volume, the prices are good, why did we hold it back? Don't just make want to make sure there isn't any issue placing volume because you said you're mostly contracted. So if you're mostly contracted, are people not taking their full volumes? Thanks.
Martin Perez de Solay
Thank you, Glyn, for your question. I'll pass it to Christian to give you some more detail.
Christian Barbier
Yeah, thanks. Glyn, as I said before, the inventory increase did not come from customers -- reduction in customer offtakes, but one from a higher production in our account, which is great news, and a lower offtake from Naraha due to faster quality increase in equality.
So no issues to play to the volume. The current level of pricings, spot pricing in China is a good price historically. Yes, absolutely. Is it the price that reflects what we believe should be the value of our product? No, it is not. And when we guide for $42, over the June quarter, we believe this is a better value that we get for our products than if we were to push our product to $28 in China.
There has been, again, a drop in spot prices in China, which has been a little bit the tree hiding the forests really. And we believe that our inventory would be better sold at higher prices.
Glyn Lawcock
So essentially, Christian, if I understand why you're basically just going to take a view that the market will rebound. I guess if it doesn't, you're either going to build inventory or be forced to sell it cheaper at a later date.
Christian Barbier
Yeah, well, the market is going to increase in volume during the second half of the year, as seasonality indicates. And yet we believe that spot Chinese prices are not representative of the weighted average price that we can get from our production.
Glyn Lawcock
All right, thanks very much.
Operator
I would like to thank everyone for their questions and hand back the call to Martin.
Martin Perez de Solay
Thank you very much. Thank you, everybody for participating. We have achieved a strong quarter with all the progress and we continue to focus on strong operational performance, project execution and managing cost through our global portfolio.
Thank you for joining us today. And if you have any further queries, please don't hesitate to contact our Investor Relations Team.
Operator
This concludes today's conference call. You may now disconnect.
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Allkem Limited (OROCF) Q3 2023 Earnings Call Transcript