Orocobre Ltd (OTCPK:OROCF) Q4 2016 Earnings Conference Call February 27, 2017 12:00 PM ET
Richard Seville - Managing Director and Chief Executive Officer
Neil Kaplan - Chief Financial Officer and Joint Company Secretary
Reg Spencer - Canaccord Genuity Limited
Clarke Wilkins - Citi
Mathew Hocking - Deutsche Bank
Warren Edney - Baillieu Holst Ltd
Amber MacKinnon - UBS Investment Bank
Andrew Hodge - Macquarie Securities Ltd
Thank you for standing by. And welcome to the Orocobre Limited Half Year Results Conference Call. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Richard Seville, CEO and Managing Director. Please go ahead.
Hello. Thank you for attending this webcast on our first half results for our financial year 2017. We’ve had a very strong half from a production and financial performance point of view. Production was 6,542 tonnes of lithium carbonate, up 309% on the prior comparative period. Sales was strong at US$60.5 million on 6,588 tonnes, up US$56.1 million on the previous comparative period.
We have an EBITDAX of US$35.4 million, a gross margin of US$5,660 a tonne, that’s a margin of 62%, and puts us way down in the cost curve. We’re getting improving sales prices. Olaroz is cash flow positive. And we announced for the first time a group net profit of US$7.4 million.
And we’re in a strong financial position with the corporate level with US$30 million in the bank account.
If we look forward, we are providing guidance to a revision downwards of our production for this half. I’m sorry about that. Of course, it’s a matter of an inventory issue. The total pond inventory levels are appropriate for design production rates. But the current inventory profile through the ponds is distorted. And we need to get that back into balance. Now, I’ll talk more about that later in the presentation in some considerable detail.
So production is - guidance for this half is 5,500 to 6,000 tonnes. And that will allow the desired growth in inventory profile to be achieved over coming months. There will be a significant production increase into the first-half FY 2018. And as we have gone through this half, we’ll provide firm guidance on that later. But it will be significant production increase into the first-half next year.
Our operational understanding has taken longer than anticipated, but there are no design impediments to prohibit nameplate being achieved. And we’ve got a good operating team on the ground which is fully motivated to achieve those objectives.
We’ve got a simplified growth strategy for Olaroz and for lithium in general. We will be expanding, obviously, subject to approval to double capacity to 35,000 tonnes of lithium carbonate production with commissioning at the end of next year. There will be a revised product mix though. So we will maintain the 17,500 tonnes per annum of battery grade material. And what we have done, moved into 17,500 tonnes of industrial grade of which 9,000 tonnes per annum will be used to feed the 10,000 tonnes per annum lithium hydroxide plant in Japan. That is the strategy.
That revised product mix leads to simplified expansion. It is a duplification of borates supply, duplification of ponds and a duplification of primary circuit, a circuit that as you know is running very well. The fast-track construction of the first module of the 10,000 tonnes lithium hydroxide plant in Japan will be fed by the Olaroz industrial grade product.
In terms of the market, strong lithium market fundamentals persist. We have got 33 current customers and a wide range of prospective ones that spread through Japan, South Korea, Europe, USA and China. We have strong demand for our products, both industrial and battery grade products. And our pricing is firming in this quarter to approximately US$10,000 per tonne, FOB basis.
Demand is accelerating, but there are significant headwinds for new production. Forecast supply will take longer than analysts’ models predict leading to a stronger for longer pricing. And we’ll talk more about that later in the presentation. With that, I’ll pass over to Neil Kaplan, our CFO, who can take you through our strong financial performance for the time.
Thanks, Richard. Good morning to everyone. Moving to the Olaroz Joint Venture Structure slide, such slide is presented to show the holdings Orocobre has in the joint venture company Sales de Jujuy Pte and the effective 66.5% shareholding in Sales de Jujuy S.A. It is due to joint control of the joint venture being equitized with Toyota Tsusho. It is equity accounted in Orocobre’s consolidated financial statement.
Presentation of Sales de Jujuy Pte allows a look through at what Orocobre’s accounts would look like on a proportionally consolidated basis and provides an ongoing reconsolidation to published accounts.
Moving to the next slide, Olaroz has been strongly profitable in the half year. This is what Orocobre’s consolidated profit and loss would look like if we didn’t equity account for Sales de Jujuy Pte and proportionally consolidated it.
The first column is exactly what is reported in our financial statement. The second column is Sales de Jujuy Pte, that is the joint venture’s profit and loss shown on a 100% basis. We then eliminate the non-controlling interest, which is the percentage we do not own in the joint venture and reverse out equity accounting, which leaves a proportionally consolidated profit and loss.
This will apply as well to the proportionally consolidated balance sheet and cash flow slide that follow. The key takeaways in the second column, which is the joint venture on a 100% basis are robust revenues of US$60.5 million and EBITDAX of US$35.4 million, resulting in a net profit after tax of US$14.7 million.
In the final column, Orocobre’s corresponding share proportionally consolidated our revenues of US$48.9 million, EBITDAX of US$20.1 million and a net profit after tax of US$7.4 million.
Moving to the next slide, the proportionally consolidated balance sheet is shown. As mentioned, this is prepared on a similar basis to all the proportionally consolidated slides. Key takeaways are: in column one Orocobre has a robust cash balance of just under US$31 million. Financial assets of US$33.6 million are now shown under current assets as opposed to non-current assets at June 30, 2016, and of the Standby Letters of Credit, which are expected to be released back to Orocobre over the following 12 months, given the upcoming strong cash flows of the joint venture.
Trade and other receivables of US$71.1 million, mainly included the shareholders loans to the joint venture and JEMSE.
Moving to column two, the joint venture at a 100%, inventory and prepayments of Olaroz increased US$9.8 million. And trade and other receivables increased US$4.1 million in six months to December 31, 2016.
The VAT receivable is split into what is expected to be collected in the next 12 months, which is included under current assets at US$18.7 million. And the balance of US$10.4 million included under non-current assets is expected to be received by June 2018. Such amounts of VAT in the financial states are at fair value and have been net present value. That collections will be discussed in a separate slide shortly.
Loans and borrowings were detailed under current liabilities at US$71.6 million, which is the short-term portion of the new Jujuy loan and a working capital facility. And under non-current liabilities, under long-term borrowings at US$222 million, which is the Mizuho long-term portion and shareholders loans.
Shareholders loans have not been made since March 2016 and the Mizuho debt has decreased by further US$10.4 million principal payment in September 2016. This will be detailed in a slide shortly. The consolidated column takes accounts of what I’ve just discussed, taking into account Orocobre’s 66.5% of the joint venture company and reflects approximately 10 million increase in mixed assets.
Moving to the next slide, this is the proportionally consolidated cash flow. Orocobre’s cash flow on a proportionally consolidated basis generates a US$10.7 million from operation, of which the joint venture contributed US$13.4 million before CapEx of US$6.7 million for the group and net cash used in financing activities of US$7.9 million.
We see this as a transition period and expect strong cash flows going forward. This is will be explained further in the following slides.
Moving to the next slide, this is the joint venture’s cash flow for the six months period up to December 31, 2016. The operation had a very strong EBITDAX of US$35.4 million. VAT refunds of US$2.6 million were negatively offset by VAT payment of US$5.3 million. However, this process has now been fine-tuned and significant VAT refunds are expected in the near term. This will be discussed in more detail in the next slide.
Finance costs of US$4.7 million and the Mizuho principal payment of US$10.4 million were paid during the period without shareholder support. CapEx of US$7.4 million was also paid during the period with US$2.4 million of such CapEx payment relating to CapEx from the prior financial year.
The main reason or just under US$1 million cash been generated besides, the best explanation about was that net working capital increased mainly related to increases in accounts receivable of US$4.1 million, and an increase in inventory and prepayments of US$9.8 million offset by decreased in accounts payable of US$4.5 million excluding that in the CapEx that was paid and related to the prior year. This net working capital movement is now expected to be stable moving forward, and we do not expect to see such large movement, which will allow for strong cash flows.
SDJ has accumulated as of today approximately US$15.6 million to ensure the Mizuho payment on March 10 is covered. There is a very strong cash flows and strong build-up of cash in this half already.
Moving to the next slide, the JV has VAT of US$35.5 million [safe spending to collect] [ph], which in the financials is reported as approximately US$29.1 million fair value on a NPV basis. The chart shows that the VAT process is now being fine-tuned and the JV have US$9.9 million of payments approved. US$1.5 million of such balance was collected during January and February this year. And the balance of US$8.4 million is expected by June 30 of this year.
The balance of US$24.1 million, which mainly relates to the construction period VAT is expected to be collected in total by June 2018. We are pleased with the way the VAT recovery is now going, as it took a little long to get the paper process right. And this process is now working efficiently.
Moving to the next slide, this details the only two external debt, which is the Mizuho loan. Key takeaway is that the joint venture will have repaid approximately US$37 million in principal of the original US$192 million loan by March 10, 2017 resulting in balance due of US$155 million.
The last two payments in September 2016 and the payment coming up next week on March 10, including interest and fees total approximately US$27 million, which are both paid out of the joint ventures cash flow with no shareholders loan being required. That brings to end the financial presentation.
Thank you. And I’ll now pass you back to Richard, who will provide an operational performance and strategic update.
Thanks, Neil. Okay, on Slide 14, I got to spend some time revisiting our process and providing a performance update on the various components of it. In overview, we are now benefitting from over two years of experience, we have a team of people, which is a completely different level of experience and skills compared to when we started two years ago. And in my view they are team that’s well equipped to take us forward.
If we look at brine production from wells, in overview lithium bearing brine is extracted with submersible pumps from bores and wells generally drilled to 200 meters depth. Brine is then pumped along pipelines to a liming plant where lime is added to the brine to raise pH and precipitate magnesium and then channeled to the first evaporation pond. The rate of pumping from the wells has a direct correlation to the building of brine inventory in the ponds and is the start of the approximately a nine month evaporation process in the pond. There is inertia in this system.
The DFS planned 18 wells operating at 10 liters per second with constant flow, two spare wells, a total of 20. Where we are now, we have 23 wells installed with a pumping capacity of 280 liters per second and that is available now if we wanted to have a full operating.
The additional wells were drilled to create redundancy to cover for outage for maintenance reasons and to provide the ability to vary flow rates at different times in the year and flexibility in pond inventory management. This calendar year, we expect the pumping to average around 200 liters per second.
If we move to the ponds, in overview, the ponds cover 4.5 square kilometers and there is a plan of those ponds shown in the top right in the presentation. These ponds, which pond design has advantages of a lower capital cost intensity and lower operating cost. The reason for the lower operating cost is we don’t harvest the full set of ponds and that reduced our cost by about $250 a tonne of product.
Over a period of approximately nine months, brine is transferred from pond to pond. And the arrows there, the red and green arrow show the movement of the brine through those ponds. And during that period of time, the grade is concentrated approximately 10 times to achieve a suitable grade to feed to the lithium carbonate plant.
Pond inventory has been stable for some time as around 40,000 tonnes of recoverable lithium carbonate equivalent, and we’ll talk more about that.
The chart to the right beneath the ponds area is an inventory chart and it has split our ponds into three components. The blue is the low-grade ponds where the brine comes from the bore and it’s the first ponds, so a group of lower grade ponds in the first stage of concentration. The orange is the intermediary ponds where it’s halfway through the concentration process, and the grey is the harvest pond. They are the last part in the process and they are the little ponds at the bottom of the plant. And they are the ponds prior to feeding for the lithium carbonate plant. And I’ll refer to that a little bit later.
Recently, declining lithium concentrations in the final harvest ponds were noted. An investigation of production and ponds inventory models against our performance, highlighted issues with the inventory model. And those inventory models were the basis for production models and [therefore declared on effect of] [ph] into the production model.
The investigation also concluded that overall lithium inventory is appropriate for design production rates, but the distribution of that inventory through the ponds has become skewed away from the higher-grade harvest ponds. And we need to reestablish an appropriate profile to support the design production rate.
This process will take up to six months and involve a combination of moving the brine through the ponds, so reallocation, or with the brine through the ponds over time and evaporation time, because this is a dynamic environment.
And in the graph to the right, what I’ve highlighted is the profile of those inventories today in the first red line or second one from the right and where we want those inventories to end up in approximately six months’ time. So you can see with the grey line, we need to increase the inventories in the harvest ponds. The amount of lithium is available for feeding to the plant through a higher level.
We need to modestly increase the levels in the intermediary ponds, that’s the orange. And we need to decrease the levels of inventory in the low-grade pond. So we’re basically pulling inventory quickly through the system on the initial stages and building up at the back stages. And the best way for us to do that is to, anyway let time take its course. We could produce more production now, but it wouldn’t be good for the long-term. So this is the time to re-profile the inventory.
Consequently, production in the second half of this year, this is this half, will be 5,500 to 6,000 tonnes of lithium carbonate to give a full year guidance of 12,000 to 12,500 and then increasing significantly into the coming half.
If we move on to the primary lithium carbonate circuit, an overview of concentrated brine from ponds feeds the primary lithium carbonate circuit to produce an industrial grade product which is either sold or used as feed for the purification circuit.
We have achieved maximum throughput of 66 tonnes per day dried and bagged which is not only effective to primary circuit, but also for drying and bagging circuit. The plant has operated at extended periods at above nameplate capacity of 48 tonnes per day, and we produce a good quality of product 99% consistent feed and that - the quality of that product has improved through the year. And that is a good feedstock for lithium hydroxide production and it also got strong acceptance in the industrial market.
The production forecast is there so - but the forecast production rate is limited by lithium available from the ponds in this half, but I would say the primary circuit is well understood and run as well.
The purification circuit which has been on the following page, an overview lithium carbonate from the primary circuit is used to feed purification circuit. This has been a focus of work over the past year as people have followed the company are well known.
During the past year, the circuit has been operated in campaigns to permit modifications of the circuit over time and profit maximization. And we’ve made incremental improvements all the way through the year by minor mechanical changes and also improving through operating practice.
Maximum production rate achieved has been 43 tonnes per day and has run at 35 to 40 tonnes per day during campaigns. And as I said our performance is improved during the year. There was one area that we flagged that was limiting our performance which was the limitations in the thickna [ph], and the solution to that was to install pipelines that remove loads from the thickna.
I am pleased to say that the commissioning which is the plant has been - has indicated very good performance and the result that we were aiming to achieve have been achieved. So that’s a good result for us here. And that should remain that the mechanics of the process of the purification circuit are now suitable to achieve nameplate production rate. We produce a consistent high quality product from this circuit with specification of greater than 99.5% and this material is used in battery sectors.
In terms of customers and pricing, this graph shows the rising of the pricing that we’ve achieved over the past quarters. In the first quarter last year, we had about $5,000 a tonne. This quarter we expect to be around $10,000 a tonne and in terms of sales to date, we’re just nudging less than $10,000 a tonne.
We’re selling to 33 customers at the moment, a broad geographical base and also a breadth in market uses as well, selling to industrial, chemical and battery markets in Japan, South Korea, Europe, USA and China. And we’re in this good position there with the rising sales and the rising price.
Moving on to the following slide about expansion. We have a rapid expansion strategy and it’s a simplified strategy as well now. The Orocobre and TTC plan a rapid expansion strategy to double the current lithium carbonate production to 35,000 tonnes per annum and to construct a 10,000 tonnes per annum with lithium hydroxide plant in Japan.
The proposed product mix from Olaroz will be 17,500 battery grade from the existing purification circuit and 17,500 tonnes per annum industrial grade, of which 9000 tonnes will be used to feed the 10,000 tonne lithium hydroxide plant in Japan. As the benefits of this mix is the lower risk, we’ve got a simple duplication of brine supply, ponds and primary circuit.
And what we get out of this is we get high pricing per lithium unit, but the lithium hydroxide sell to a premium and has a value add in the process of conversion from lithium carbonate from lithium hydroxide. So we significantly improve our margins with this process.
The simplification of the expansion Olaroz results in a reduction of CapEx from $190 million to $160 million. And the lithium hydroxide plant can be estimated at $30 million in Japan. We expect the debt facilities similar to stage 1 from our current finances, and we expect debt for the [phase in] [ph] Olaroz and we expect debt and subsidies for the lithium hydroxide plant in Japan.
We will still have an unallocated amount of industrial grade product, and we can either continue to sell that always you can see that a second lithium hydroxide plant and that will depend very much on how market conditions develop.
On the following slide, we have expansion timetable, very simply both projects will run pretty much in parallel, and we will be commissioning on the backend of next year with meaningful production in calendar year 2019.
So how we’re going to fund this? Well, we are not going to be going back to shareholders to raise equity. We have strong cash flows over the next three months and they will fund this expansion. And the data presented in this slide sets that out. As a point of deepest draw on the assumptions of debt and the plot of the deepest draw we would have $22.6 million proper in the Orocobre account. But I repeat we are certainly not intending to come back directly market raising money for the project.
If we move forward to exploration and Borax Argentina, there is more to Olaroz than what we’ve got foreshadowed here. I’m not going to go into detail about this, but this is a world-class resource, it start over 6.4 million tonnes of lithium carbonate equivalent in the top 200 meters. The basin goes down to 600 meters. We got additional target north and south, and this resource ultimately will be much larger than we saw.
And the point of - the reason we’re making that point is that this asset is expanded little past the Stage 2. Of course that’s a long way in the future, but we must - we should not forget that this is a world class brine resource, and we will add further value at the time.
In terms of other exploration, we’ve vented from other properties into Advantage Lithium that can advance those properties faster than we can. We stay at a joint venture partner also in Cauchari. We look to supporting Advantage Lithium - look forward to supporting Advantage Lithium on their work. And I know that David particularly is very keen to be pushing the company forward aggressively.
On the Borax Argentina sales volumes were up 14%, and we improved our EBITDAX that made a small loss, and I think a lot of your expansion studies are advancing and we expect to provide guidance feasibility study in the middle of the year.
So on to markets. Just a little bit of flavor here in terms of what government plans will be to market if they come to provision. Announced government EV targets will require just over 500,000 tonnes of LCE, lithium carbonate equivalent between 2015 and 2020. Carbon productions is around 200,000 tonnes per annum. So this is significant additional demand manufacturing 12.7 million new EV.
So a strong demand, and if we turn the page a more complex supply situation. Our view is always that supply takes longer, it’s more complicated and it’s also over simplified in terms of the storage of how supply is going to meet market. And I have to say, if you look at the performance of projects around the world, reality is matching the - matches that rhetoric.
In terms of our view of ongoing supply, what we built-up in these charts, and this is just an update of our standard peers, is the committed capacities. I mean, the capacity is coming from committed projects or projects that are in production. We include SPM and liking that even though there has been no formal announcement of construction and of course, the hard-rock project in ramp up mode in Western Australia.
And based on that, we can see that the supply response only just reaches 10% compounded annual growth rate line. And any performance above that to a more reasonable 14% lines as supported by the strong demand, we’re struggling on achieving. So our view is we staying in line to supply of lithium carbonate for the foreseeable future.
So if I may summarize. We had a maiden profit of $7.4 million in the first half of this year. We’ve established ourselves as a low-cost high margin producer with an EBITDAX of $35.4 million from our joint venture of Olaroz.
We are rapidly progressing plans to doubling our production to 35,000 tonnes of lithium carbonate at Olaroz, part of that will see the 10,000 tonne per annum hydroxide plants in Japan, which will add significant value. Our expansion plans will be funded without new equity and we are in - we’re growing our supply into a market that we think for remain in deficit for the foreseeable future.
So that wraps up the formal part of our presentation and we can open up to questions.
Thank you. [Operator Instructions] The first question today comes from Reg Spencer of Canaccord Genuity. Go ahead, please.
Thank you. Good morning, guys. A few questions for me, actually quite a few. I might start first with this pond inventory issue, Richard, and if you could explain it to me in a little bit more detail as to what exactly has happened there, which is impacting or going to impact production in the second-half. And probably just as important, when did you become aware of this issue in the pond?
Okay, Reg. Well, it’s a little bit complicated, the things often are. I referred to inventory models and production models. And the way our production models work is that they look forward from the current inventory, that we will make an assessment of the inventory and that becomes the driver for the production forecast. And why, because it takes a considerable period of time, this process of evaporation and feeding brine out at the end of the pump.
So if we look back at last year and the last half, our production models were consistently reporting to us a strong second half. But it became clear with declining grades in the ponds recently that that wasn’t going to eventuate, and that really became the focus of enquiry.
And what we discovered was two things. Firstly is that there was an error in the inventory model calculations, now this is a 20-megabyte spreadsheet. It’s fairly sophisticated. And within the inner workings of that spreadsheet, there is an error, which was actually creating an inventory that didn’t really exist in a couple of the pond. And this was an error that if you went back 12 months ago was negligible.
But as time went on, it compounded. So by the time it got to the - towards the end of the half it was suggesting there was significant inventory in a couple of the ponds that wasn’t actually there. And that was then driving our production forecasts three or four months later, that was not really there. And that was the problem. So that’s one aspect of inventory.
The other aspect of inventory is that in the final ponds, the harvest ponds. Although, it’s a recoverable inventory, it’s correct if I can put it that way in the graph, there is actually a proportion of that that is not immediately recoverable. We recover it when we start mining that salt. It’s the only ponds where we actually you do recover the salt and we drain the salt and we get an ongoing process later on of recovering that inventory.
So you need to have a higher level of inventory in those harvest ponds than you would have anticipated. So those areas are fully understood now, and the models are being adjusted. And consequently, we can confidently say that we need to make these changes in the inventory level. So increasing the inventory levels of higher-grade material in those harvest ponds, and reallocating through the system from the low grade ponds through the intermediary ponds. And that’s the process we go through.
So I think that answers both of your questions.
I might just - just to make sure I understand this correctly then. So it appears that there was a reconciliation issue between the production model and your brine inventory model. There was an error in the inventory model which wreaked havoc you’re your production model.
But secondly, it sounds like that there is some lithium brine caught up in the highlight - in the base of those ponds that is not immediately recoverable, and hence, that impacting the volume of material that would be available and be putting to the chemical plant over the next six months. Is that…?
Almost, almost, almost. The first bit is that there is a - there was a performance - there is a lack of reconciliation between performance in the ponds and the production model. But the production model is based on the inventory. Now, that was becoming an apparent and that was what caused the investigation.
And in terms of the losses in the salt that you’re talking about, within the bulk of the ponds, that’s a permanent loss. So that’s taken into account in the calculation of recoverable inventory. So I want to make that clear. And in terms of the losses of brine within these final ponds, it’s a temporary loss because we mine the salt out later and drain as they do at Atacama.
So you recover that high-grade brine in those final ponds over time. And when we look into next financial year, we will start doing that process. It will take one pond offline, mine the salt, drain it and you basically create a new - an empty pond in that process, and that will happen by rotation from next year.
Okay. Richard, as you know, we recently visited sites. And that was a matter of weeks ago. Can you give me any indication as to when you became aware of this inventory issue?
As I said, this became particularly pertinent when we were looking at the range being less than we’re anticipating through January and February. And where we’re looking right now, and this is why my forward plans change probably, is we’re looking at a real time investigation here with a real time results. So this is very recent.
Okay. And I got…
Just one point I would like to point out as well, is that we could run these ponds harder now. But if we run these ponds harder now, then we’ll get a worst result over time. And that is because if we run them harder now we’ll end up with an increasing, a drop in grade over an extended period of time. And recovery of the plant is proportional to the grade that’s fed through. So it’s always better to be try and to produce a higher grade feed to the plant.
So we’re going to take a bit of medicine here. And I am sorry about that. But this is the right thing to do to establish the inventories for the longer-term benefit.
Okay. I’m conscious of not monopolizing of course. Maybe some of the other questions I might take offline. But I’m really interested in your medium-term production outlook by FY 2018 guidance, for lack of a better term. You noted that you expect production to increase significantly into FY 2018. And considering that you expect the pond inventory issues to be rectified within a period of six months, any reason why you have shied away from providing guidance for next year?
Yes, I’ve been a little bit cautious about doing that based on recent experience. And I want to make sure that over the coming months we fine-tune our inventory measurements. And I say measurement there rather than modeling, because we are going to do a better metrics survey over all the ponds. And we’ll continue to do work on this.
I don’t expect material changes, but what I do expect is that we’ll find that the profile of the salt is different from assumption. And that may well drive the production forecast a little bit differently.
So the overall trends will be strong in terms of the way we are talking that there may be some nuances. But we need to refine that, to then refine the production model, and make sure that the guidance we provide is something that we can deliver on. But I’m very confident that we are going to have a much stronger second half than first half in this calendar year.
And if that’s the case that we do have the inventory we expected to be, then we have a plant that is ready to pump through the product. We have a very good performance out of the primary circuit and we can take full advantage of that situation.
Okay. I have got a question to for Neil on depreciation, but that’s - I don’t know if it’s relevant at this point, so I might take that offline. Thanks, guys.
Thank you. The next question is from Clarke Wilkins of Citigroup. Go ahead, please.
Hi, guys. Just a question just sort of further on the pond side, is there additional pond capacity required, i.e., any additional CapEx required with [somewhere they tie, right,] [ph] I wonder you’re comfortable that they are actually use enough capacity within the pond system. Also in sort of ex the expansion CapEx what sort of level of CapEx should we look at going into the second half of this year and into next year, just to sort of, say, business CapEx for the plant.
And finally, just in regards to sort of the lower production guidance, how does that affect the contracts in terms of that realized pricing into the sort of June quarter, either carryover tonnes that could potentially sort of an implications for pricing in that sort of fourth quarter?
So answer to the first question is no, we don’t expect to need any more pond area. We’ve got good pond area or we got the right pond area. And that’s going to deliver the goods. Second question was on - sorry, what was the second question, Clarke?
In regards to the CapEx?
CapEx, ongoing CapEx we haven’t done the budget for next year that’s a process we are going through now. But it would not be unreasonable to think between 5 and 10, and closer to 5, excluding expansions started and things like that. I’m referring to sustaining capital on the plant. It would not be unreasonable to thing as 5 of the ongoing sustaining capital. And the third one?
And the third one, it’s just in regards to also the realized pricing like with the lower production in this half, how does affect the sort of the contract and your ability to leverage off the higher prices in the sort of market.
Of course, we are going to lose revenue if you see what I mean. But if there is a lot of supply, potentially it means higher pricing. And I think that’s not only from us in that regard, I think that’s a potential for what to be happening in the Chinese market. So I think we can still leverage off pricing our product in significant demand.
Great. Thank you.
Thank you. The next question is from Mathew Hocking of Deutsche Bank. Go ahead please.
Yes. Hi, Rich. I want to first get on with pond issue. And evaporation [Technical Difficulty] if we just come back to 33% brine and have [sold your lining pond almost in the nine months] [ph] evaporate the brine. You should have had, yes, irrespective of all the reconciliation, not enough higher grade brine in half. So what is for that? What typically occurred in pond? Did that meet your expectation on [Technical Difficulty] has seen evaporation issues of precipitation. What happens typically on site to drive that?
Even though evaporation, in fact the evaporation rates are higher than our feasibility study, which is positive, which is hence why I’m making a comment about the overall pond areas. Precipitation, no. Of course, you get precipitation through the year, but nothing that is material to affect this kind of change.
The issue actually is how we’ve managed the pond. And so, we have a production model that says that we should do certain things. You should move this volume from this pond to this pond to get that result. And your schedule is therefore dictated by your production model.
If your production models floored, then you haven’t actually done the movements you need to achieve the result that you didn’t know you had, if you see what I mean. Now, that’s the kind of driver of management, but those things we can do better in terms of our pond management. I’m not saying in this process that our pond management has been perfect.
Can I - just so I understand that comment around moving the brine around in the pond system. So it was a time period where the material that’s sitting in your primary pond is scheduled to be moved to the intermediate pond. You guys have done that, but that brine has concentrated [indiscernible] they may be moved to intermediary pond. Was that a concern? Because I understand the point of all this, is that you’re not getting the concentration required through these final pond.
So it is affecting your new material running, readily moved into the higher percent, yes?
No, that should be in running some pond. This is getting to the detail, which I’d be happy to take you with later. I think we’re meeting this afternoon, Mathew, and maybe I can just talk it through a more detail later. But you end up with ponds, because you don’t move - because you’re not moving your volumes fast enough through the systems, you end up with certain ponds with deeper inventories than you should have if you - in retrospect if you see what I mean. And so since that’s deeper than they should be in retrospect compared to the models, you end up with a lower evaporation and concentration rate of that volume.
And so the whole process kind of slows down, because you haven’t spread it out thin enough. And you haven’t moved it through the system fast enough. So if you go back and say, if I done it in a different way would I got a different result. The answer is yes. But the warning signs there, the warning signs weren’t there in terms of the reconciliation of production to model in the last half, because the area in the inventory was from the previous half in building if you see what I mean.
So it’s massy and unfortunate, and I don’t like it. But it’s a clear way forward of what we got to do and what we have to do is to move the brine forward in a more aggressive way with a different production schedule of how you move forward and have the ponds operating in an optimized way. And there is plenty of capacity to improve performance there. So I don’t have any doubt that if we get these movements right - the movements to the ponds to where they should be according to this model, we’ll have the end result that we want.
Okay. Now, I’m trying to get [Technical Difficulty]. But if I look at that chart you put in Slide 16 showing the inventory level across three different ponds. The inventory in harvest pond P and start the [Technical Difficulty], so that as you’re ramping up your production rate, you started to see the inventory in harvest months declining. So you are taking out what much you’re putting in. Should that one be in the third running line that you had an issue?
Yes. But that’s adjusted inventories after we made the correction, and that’s what it shows now and that’s exactly right. And you can see what’s gone wrong. So that’s spot on, Matt, in that regard. But that is a recalculated set of inventories, not the inventories that we have been looking at over time.
So what’s the required inventory level in the harvest ponds, brine, the operation [Technical Difficulty] how would we come on, six months’ time you’re going to be back in sort of around 1,200, what’s the design requirement for higher grade retrieved in harvest?
Well, around the levels that we’re showing there, which is on 1,200, 1,300 tonnes of lithium. But that will not be a fixed figure. But it depends on the pre-board compared to the recoverable. So again, the devil is in the detail, and that’s something that’s we have to be moderated over time. But on a comparable basis, that’s the figure.
Okay. All right, now, I’ll go through my detail and I’ll save a potential up, but I just…
Yes. I look forward to that, Matt.
One more question on the guidance provided around the cash position by the end of June 2018 based on the expansion project. There might be a lithium output and a realize price assumption embedded within the cash flow. Are you going to provide that at all, just so we understand where that US$20 million of cash is relative to, to make my own assumptions what you may going to achieve. But what are you have embedded with that in the production and realized front?
Well, in general sense rather than the detail, it’s obviously a flat half, if you see what I mean. And then it’s a modest increase in the going through July, August, September and a very strong finish. So I’m not going to provide more detail on that until I’m confident that we can achieve the numbers. But that’s what’s in our cash flows and it’s reasonable. And in terms of pricing, it’s the same kind of pricing we’re getting at the moment.
All right, I will pass now, thanks for your response.
Thank you. The next question comes from Warren Edney of Baillieu Holst. Go ahead, please.
Hi, thanks very much. I would just move on to the purification circuit and the pricing is that correct. Can you just give me some understanding of the performance in terms of purification circuit, when the nameplate capacity is being - well, your throughputs being going up and down? And what sort of quality you’ve been getting?
And then just give us a bit more of an understanding about what proportion of battery versus industrial product that you’ve actually been producing? And have it changed over time? And perhaps, maybe a bit of color on what the prices that you’re getting for either of those, please?
Right, I’m trying to remember the first part of that question.
It was more of the - the performance of the purification circuit. How has it been performing in terms of, like you said, it’s been consistent at 99.5, but seems probably a bit optimistic given the irregular production.
No, no, no, not at all actually. In fact, I’m downplaying our specification there. That is minimum spec. The typical spec of our product is 99.9 and the levels of impurity are in fact very low and consistently low. So it’s a very nice product. I just don’t think it’s a good idea to be sort of banging our way about super purity material. It is not particularly germane to the debate.
So this is a good product for the battery sector. It’s well received and the standard spec of battery grade material is plus 99.5, so hence why we put it that way.
Okay. And the product mix?
Well, I’ll go into that. In terms of the running of the circuit, as I said, without increasing the - increasing levels of, say, consistency and performance, I’m not talking about quality and performance. I’m talking about stability in the plant. Every time we do a campaign, we have a more stable plant, a greater running operation, more relaxed operators, is how we want to put it. It’s part of that learning of operating.
And a lensing factor has been the thickness and that’s limited just about 35 tonnes to 40 tonnes per day, when we had the - back in December, November, when we had the brine available from the ponds to feed the primary circuit.
In terms of the product mix, October, November 35%, 40% battery grade material. In December, we had a strength of producing more industrial grade materials. That’s what the orders were. In January, we had about 40 battery, 60 industrial. And in February we’re having more pushed towards battery.
Okay. So the comment, I think at the quarterly in terms of the pricing and that sort of thing, that reflected a change in product mix, as well as the issues with the shipments, did it?
It’s partly product mix, it’s also that in the last quarter we had some lower price to industrial deliveries into the Chinese market that we entered into in October after we provided the previous guidance. And you recall - if you recall in the previous half when we provide a guidance out of purchase softening conditions in China, well as we finalized with TTC finalized some of those contracts, we’ve got seasonable down a bit on some of those contract. They pass through the system now, and the market conditions have changed significantly.
So hence why you’re seeing the stronger pricing in both products, and in terms of the - I’m not going to talk pricing of individual product, because we talk about the weighted average. But all the commentators in the market are pretty spot on at the moment on a CIS basis or DDP basis. And of course, we are reporting on an FOB basis. So that’s the value that the joint venture in Argentina gets net of costs after exports. So agency fees, insurance rate, delivery et cetera. So that’s a net value that we get back on the joint venture.
Thank you. The next question is from Amber MacKinnon of UBS. Go ahead, please.
Hi, Richard and Neil. Thank you very much for your time today. A couple of quick questions for me mainly around the expansion plans that you gave more detail on today. And it’s still good news too, to see the CapEx a little bit lower than you previously expected. Just in the context of the proposed product mix that you talk about except the 17,500 tonnes of battery grade from the existing purification circuit and then 17,500 tonnes of industrial grade.
Can you give us some insight into the cost differentials that we could see in terms of operating cost of point, running brine through the primary and purification circuit to get battery grade versus just running it through the primary. And I don’t expect you to give a specific, but if you could give some indication of a quantum of different in cost that would be really useful.
One other question I had with regards to the purification circuits, it’s great that you’re able to achieve that sort of 90% of nameplate capacity, but you’ve been able to demonstrate so far, and with the commissioning of the cycling, when do you actually get, you’ll be able to hit that nameplate of 48 tonnes per day on a reasonably consistent basis? Thanks very much.
Okay. The differential on operating cost at the moment, it’s around $200,000 of tonne, and we expect that to come down at a time with improving performance, and reagent reductions through CO2 recovery also to from the generators down to about $1000 of tonne in broad numbers. And really, I’d have to go into more depth to be, so if that’s plus or minus 25%. And when you look at the - what was the other question on the purification circuit?
The commissioning of the pipeline [ph], when do you think…?
Yes. The commissioning is going well as I said, unfortunately, we also serve really test the places of that until we’ve got the brine inventory backing that to where it should be. So although well it got the mechanical bit is done, what ultimately will control the throughput rate over the coming months is the feed accounts from the ponds into the plant. And if we’re not pulling in the 50 tonnes per day after recovery, then of course it’s not possible to run the purification circuit is hard as we would like.
So unfortunately you have to wait for that.
So you’re applying for that we won’t be able to obviously might be able to see that right through the time as the brine - pond issue that…
There is no doubt on extended period of time, but it may be possible to actually sort of tested over shorter period of time. But I need to work with the site people to be able to provide better guidance on that, I just call on to that right now.
And that makes sense. So if you don’t mind, I just have a couple of follow-up. One, in terms of timing of approval moving ahead with the expansion, would you be able to give an implication of the rough, I mean, if for instance we see this is approved in the coming months over the next half. Could you give an indication of the rough little timeline of how long the project would take to run in terms of that 160 million over one period? Would you expect that to be 10?
It’s about a year, and the majority of that is on ponds as you know. And just to give a context, if the ponds will get constructed sequentially and also the first pond is done you start filling it. So bores come first, we’ve already got excess capacity there, so bores are there on some additional months when we need it. They start filling the ponds, second pond gets built, the third pond. And you start filling incrementally.
So the construction is period is over a year. And there is an overlap of the fixed plant. And it’s basically a sort of steady build, a steady spread of 160 over that 12 months period.
Okay. Thanks so much for your time.
Thank you. The next question is from Reg Spencer of Canaccord Genuity. Go ahead. Thank you.
Oh, thank you. Sorry, guys, I’ve just got a little question on the expansion funding. I think previous discussions with the guys a question, where the cash sit by, would the funds remain in the joint venture and be used out of the joint venture to fund the expansion works. But I see that in your presentation that you’ve got cash coming out from the Topco as the contribution to that expansion capital.
So why would you not display the money in the joint venture as opposed to pulling it out and putting it back in again?
Reg, it’s Neil. That’s due to we’re sitting with the guarantee offshore, the Standby Letters of Credit are sitting, mainly 80% of it sits in offshore. So we would release it to Orocobre and then work out there after how we put it in, which in all probabilities would be in - through shareholders loans. So that’s the main reason. The funds are actually sitting offshore.
We could - a second option would be to go - we’d leave those in place and use the working capital facilities there, because that’s what - with the reduction of those working capital ability helps to - well, it does reduce the Standby Letters of Credit back to us. That we could keep those Standby Letters of Credit in place and have those facilities available in Argentina.
Okay. I understand. Thank you.
Thank you. The next question is from Andrew Hodge with Macquarie. Go ahead, please.
Thanks, guys. I guess, the part of the question I wanted to ask is sort of a multi-part. So if you cut your forecast of production for the rest of this year by sort of about 40%. I mean, if then you’re going to ramp over 18%, I’m trying to understand in terms of what that’s going to do to cost; and then whether or not your previous target, when you thought that you could try and hit cost by the end of FY 2018 are still realistic.
And then as a follow on from that, I can see that you go the SBLCs being repaid and have moved them to current from non-current. But, I guess, just what I’m trying to think about is if I were to think about lower production levels, operating cost now maybe not being as low as what you anticipated. And then, whilst you can do the SBLC a lot of your other loans have like definitive timelines when they start being paid.
And I’m just trying to work out, how does the vehicle actually generate sufficient cash to be able to try and repay that back or is it something that I’m missing there that you guys can help with?
Well, I’ll start off for the first bit. And I’m a bit confused about the second bit. But overall, we can pick up the second bit in a bit more detail when we meet later. And in terms of first bit, yes, we won’t get quite the reductions that we were anticipating, because your [fixed assets] [ph] are spread over smaller tonnage. So it would not be unreasonable to think that the current operating cost continue forward at the same level as they currently are, because the production rates is approximately the same.
Some of the programs also where we were - well, I just mentioned that the - to Amber’s question, some of the programs which we were expecting to, have delivered on by now, which is the CO2 recovery are a little bit more complicated. And the engineering has taken longer. And there you get - they’ll get pushed back into next half. So that will also delay some of the savings that we expected, but the longer-term target is still current.
Okay. And I guess the other part then is given that, are you still comfortable with them? If I get to Slide 22, which Neil was talking about…
Yes. Yes, because that takes - look, we forecast in a whole lot basis. So the ongoing operating costs at current levels, until when we expect them to come down, I can see what you mean, with the production levels sort of taken into account is inventory adjustment aspect. That’s taken into account, fully taken into account in Neil’s guidance on Slide 22.
Yes, Andrew, I don’t know if you mentioned other loans, a repayment of other loans. I mean, the only real external debt is the Mizuho. The rest is shareholders loans and the working capital facilities are backed up by guarantees at SBLC. So I think you mentioned that, if not, offline when we meet we can discuss it further. But the other lines I think you mentioned that’s shareholders loans.
So, yes, I mean, Neil, we can talk about later in detail, but I just wanted to check are you saying that’s the shareholder loans of the - like the live or like the various different ones that you guys have, as opposed to when they’re talking about being paid in from March 2018 and 2019, they might be delayed.
No, no, we’re expecting shareholders loans. The SBLCs we expect back in the next 12 months, this calendar year. And we’ll also start towards the end of this year repaying. Once we’ve done that, we’ll start repaying shareholders loans, which we expect to be fully repaid by the end of next year, calendar year, so…
So I think they’re in line with previous guidance.
Yes, that’s in line with previous guidance. And obviously, with expansion we’ll see what needs to be done when the time comes for funding.
Okay, all right.
Thank you. The next question is from Warren Edney of Baillieu Holst. Go ahead, please.
Yes, just a follow up on the hydroxide plant CapEx. I did read something somewhere about the subsidies from the Japanese government being quite substantial. Can you give us any update on those?
Yes, we’re expecting a 50% capital subsidy on construction.
So is that via a soft loan or is that they’re actually going to pay that?
Grant and there is a potential for soft loans as well. So it’s a well-supported investment. And there are also some ongoing subsidies in terms of operating profit as well, as long as you employ a certain number of people. But there is a very attractive investment environment for this project in Japan.
Okay. Thank you.
Thank you. There are no further questions at this time. I’ll now hand back to Mr. Seville for closing remarks.
Well, look, thank you for attending this webcast. I’m not happy that we had to have some bad news amongst what was actually a very, very good half. The company has delivered some very good results in that last half. And it’s been a pleasure to kind of see the operational team building confidence and deliver outcomes through the half.
It’s not easy developing client projects, or any projects for that matter. And I think we’ve got a good team delivering some pretty good results. So it is upsetting to deliver a disappointment when we’re going forward. I’m sorry about that.
But if we look through this year, an awful lot is happening for the company. We will build solid performance, operating performance in the stage one. We got the expansion study, the expansion project to Olaroz and the hydroxide plant in Japan. And the profile that we can deliver in 12 months should be a very, very strong profile. And I look forward to having a different kind of call in 12 months’ time in that regard.
So again, thank you for attending the webcast. And I’ll probably see many of you over the coming days. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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