Allkem Restricted (OROCF) CEO Martin Perez de Solay on Q3 2022 Outcomes – Earnings Name Transcript

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Allkem Limited (OTCPK:OROCF) Q3 2022 Earnings Conference Call July 19, 2022 8:00 PM ET

Company Participants

Martin Perez de Solay – MD and CEO

Christian Barbier – Chief Sales and Marketing Officer

Keith Muller – Business Leader, Australian Asset

Neil Kaplan – CFO

Conference Call Participants

Joel Jackson – BMO

Reg Spencer – Canaccord

David Deckelbaum – Cowen

Hayden Bairstow – Macquarie

Lachlan Shaw – UBS

Kate McCutcheon – Citi

Glyn Lawcock – Barrenjoey

Operator

Good day, and welcome to Allkem Quarterly Results Conference. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. [Operator Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you.

I will now welcome Martin Perez de Solay, Managing Director and CEO to begin the conference. Martin over to you.

Martin Perez de Solay

Thank you, Paul. And welcome, everybody. And thank you for joining us, for Allkem Limited June 2022 quarterly results briefing. I am pleased to provide an update on our operations and development assets around the globe.

Despite a lot of noise in the lithium market and increasing global challenges this quarter, we have concluded the 2022 financial year, with record revenues and production volumes generated from our two lithium operations. These demonstrates the strength and resilience of our assets team and the business.

During the quarter, our cash balance increased by over $213 million, and we achieved record revenue of $337 million from Mt Cattlin and others with a gross operating margin of approximately $292 million. Strong projected cash flow and the $663 million we have in group cash is expected to fund the delivery of our aggressive growth strategy to increase production threefold by 2026.

Our teams continue to advance the development of our project pipeline, and we’re on the cusp of significant growth with Olaroz Stage 2 and Naraha to begin production later this year. Sal de Vida in 2023 and James Bay in 2024. This growth strategy is underpinned by the transition to net zero emissions to the electrification of transportation. That will require a significant increase in global lithium production of global production of lithium chemicals.

This quarter, I am pleased to welcome a number of new members to our Executive team, who will enhance the delivery of our growth strategy. Karen Vizental has joined us Chief Sustainability and External Affairs Officer. Karen has extensive experience in multinational organizations, such as Unilever, and will lead corporate sustainability activities, including Allkem’s journey to net zero emission by 2035.

James Connolly has joined us Chief Project Development Officer. James has extensive operating and project development experience and has previously held senior positions with Vale Base Metals and Barrick Gold Corporation. He will assist us on delivering our growth assets.

After successfully heading the sales and marketing function, Christians Cortes have taken up the role of Chief of Staff, working closely with me. Christian will utilize his vast knowledge of the business and the lithium industry to support its business functions within the Allkem’s executive growth strategy.

Christian Barbier, also joined the organization as Chief Sales and Marketing Officer. Christian has a long history in sales and marketing of industrial minerals, having held positions with Iluka and Sibelco. He will be assisting us in enhancing our sales and marketing strategy. And he’s also joining me on the call today and will provide us with a market update.

Firstly, starting with sustainability, the core pillar of our business. We continue to be recognize for our leading practices and endeavor to increase our transparency and performance.

In June, Allkem become a constituent company of the FTSE4Good Index Series, which is designed to identify companies that demonstrate strong ESG practice measured against globally recognized standards. We also achieve the highest available Comprehensive rating in the Australian Council of Superannuation Investors. Annual detailed assessment of ESG reporting in ASX200 companies

Having a closer look at our sustainability performance across our operations. Recently we have achieved our best safety results since becoming a merged entity with a Total Recordable Injury Frequency Rate of 2.6 at the end of the quarter. This reflects a 23% improvement from the prior quarter and a lost time injury rate of 1.0 for the rolling 12-months.

Unfortunately, we did incur two recordable injuries Mt Cattlin, one more severe than the other, but both contractors had made a full recovery and return to work. Preventive actions have since been implemented.

Mt Cattlin was impacted by COVID 19 cases at site over the quarter, with peak caseload of the Omicron variant in Western Australia occurring in May. Contractors and personnel followed site Biosecurity protocols. Remaining global operations continue to follow Biosecurity protocols, and the impact of the new virus diminish proportionally to those countries case numbers.

We continue to maintain regular and positive engagement with the communities we work. Some of our initiatives this quarter including education around the construction of Sal de Vida project, and technical and leadership training in both textiles and plumbing.

Moving to our operations. As previously stated, Mt Cattlin was impacted by COVID-19 and the tight labor market in Western Australia. However, we still reach record annual production of approximately 194,000 tonnes of spodumene concentrate in financial year ’22. Feed recovery guidance of 56% and achieve record revenue of approximately $181 million in one quarter from shipments totaling approximately 38,000 tonnes.

We achieved a gross margin of 84% for the quarter, and we expect margins to remain high, with robust demand in the spodumene market and the September quarter pricing that is expected to be better than the June quarter.

Looking into financial ’23, the September quarter — in the September quarter, a number of improvement programs will be completed including the addition of magnetic separators. A larger mining fleet will be deployed to site and the addition of third party contractor services will provide further flexibility. This initiative will assist in transitioning to the two Northwest bid and enable a ramp up in our production from the end of the quarter in line with full year guidance.

This quarter, we also commenced a three phase resource extension drilling program to test immediate mine life extension. As of June — as of 30 June, we completed 37 holes, and a 1,690 meters of drilling. An update of results will be provided later in the September quarter. The current drilling program is expected to be completed towards the end of calendar year ‘22.

Moving on to Olaroz, annual production reached a new record of 12,863 tonnes of lithium carbonate for financial year ’22, 47% of which was battery grade material.

During the quarter 3,445 tons of lithium carbonate were produced and 3,440 tomes was sold, generating record revenue of $141 million with average pricing of $41,033 per tonne FOB. Sales of batter grade lithium carbonate represented 45% of the total.

Gross cash margin for the quarter was 90% or $36,732 per tonne. Margins are expected to remain strong with lithium carbonate contract pricing for the September quarter remaining stable.

By the end of June, Olaroz Stage 2 expansion had reached overall physical progress of 88% completion. With commandment of ramp-up expected in late second half of calendar year ‘22.

Evaporation ponds are completed and commissioned. The majority of the wealth and our operating and the remaining three are scheduled for completion in July. The third Lime plant is at the final stages of commissioning and start-up is scheduled for the end of July. By September we expect the fourth lime plant to be complete and the Soda ash facilities to be commissioned.

Carbonation plant activities also progress and it is expected to be completed in the December quarter.

Moving on to our development assets, that will underpin significant growth at Allkem in Naraha, the construction of Naraha lithium hydroxide plant in Japan have been successfully completed. Commissioning activities including water tested have been undertaken, and first production is expected late September with some expected ramp up period of approximately 12-months.

At Sal de Vida, we made strong progress since construction commencement in January. Construction of the first two strings of bombs for Stage 1 has reached was 32,000 completion — 32% completion with the first pond now filled with brine. For the remainder of the calendar year, efforts will focus on commissioning the first string of operational ponds and commencing the construction of the carbonation plants.

This quarter, we also successfully expanded the Camp facilities and have progress procurements from long lead items and the tendering process for our targeted 30% photovoltaic energy solution on site.

The Stage 1 schedule is targeting first production in the second half of calendar ‘23, with brine evaporation occurring during plant construction, allowing evaporated brine to feed the plant once it is commissioned.

At James Bay, our project in Quebec, Canada, detail engineer progress alongside procurement during the quarter, including awarding key equipment packages, budgets has been allocated to align detail planning construction to commence some time.

Therefore, the clarification process of the environmental social impact approval continues with both provincial and federal levels in conjunction with the Cree National Government. And the meetings are planned in July to review information provided.

We are now targeting construction activities to commence in the first quarter of calendar year ’23, with commissioning in late first half of calendar year ‘24.

I will now hand over to Christian Barbier, who will provide us a sales and marketing update. Christian, welcome to Allkem, and please talk to our shareholders.

Christian Barbier

Thank you Martin and good morning everyone. Markets and customer demand for both lithium carbonate and spodumene concentrates have remained robust during the quarter despite a soft start due to COVID related lockdowns that occurred in China.

Sales and production rebounded strongly from May onwards as the lockdowns were lifted. And total EV sales in China for the June quarter were estimated at 1.3 million units, is up 50% from the prior corresponding period, and up 20% quarter-on-quarter. So with 2.5 million units sold in China in the first half of 2022, EV sales are forecast to increase to a total of 5.5 million units according to CAAM, the China Automobile Association and up to 6 million units for some observers by the end of the 2022 calendar year.

Further EV battery installation volumes were estimated at 52 gigawatt hour during the quarter, which is in line with the March quarter and up 80% from the prior corresponding period.

In Europe and in North America, overall car sales have remained weak due to the economic and political environment but positively EV sales and EV market share have continued to increase in both regions.

The market shares of EVs passed 6% in the US since May, with 400,000 vehicles sold in the first half of 2022 versus 600,000 for the whole of 2021. And the EV market share remains over 20% in the EU, and is expected to increase further as growth is endorsed by government stimulus and policies in support of net zero economies.

So we continue to see strong demand for a range of lithium chemicals, which supports Allkem’s diverse product offering. Demand for LFP battery formats, lithium iron phosphate, continues to dominate in China representing about 55% of battery chemistries. Outside of China, we continue to see high nickel cathode as the preferred chemistry, with a number of new Giga factories announced in North America during the quarter.

Moving to the supply side, we’re starting to see increased supply in response to high prices and strong demand. However, we expect the demand to still outstrip supply side responses in the coming quarters.

The lithium chemical production in China during the June quarter, is estimated to have increased by more than 20% quarter-on-quarter. Thanks to a higher supply of mineral feedstock, first from local sources as weather conditions improved and second highest spodumene concentrate imports from Australia.

Indeed, there was a strong increase during the June quarter of spodumene concentrate shipment from Australia to China, 50% higher quarter-on-quarter. And the incremental volume originated from brownfield expansion and from restarts of idle capacity.

Shipments in the June quarter will mostly be consumed during the second half of this calendar year. And we expect utilization rates of conversion facilities in China to be boosted, but still not reach full capacity.

Supply security remains a concern for OEMs, who have all mostly committed to electrifying their fleets. And as a result, relationships between OEMs and junior miners continue to be reinforced through direct investments in lithium assets. While its clear, is that the race to secure key critical materials has intensified further across the EV battery supply chain.

Now for prices. During the June quarter spot prices for lithium carbonate and hydroxide in China reduced by 8% and 5% respectively from the all-time high prices registered in March 2022. This easing is reflective of reduced EV and battery production activities as a result of the lockdown in China in April.

I’d say China on the other hand, spot prices for lithium chemicals continue to rally during the June quarter and reach parity with Chinese prices demonstrating strength in the Japanese and Korean cathode and battery manufacturers.

As far as spodumene concentrate is concerned, spot prices registered record highs during the quarter, with prices increasing more than 50% quarter-on-quarter.

Despite increased supply volumes from Western Australia, during the quarter supply side tightness is still prevalent as the strong demand from converters we need to source feedstock for the lithium chemical production. Everywhere contracted prices for lithium carbonate and spodumene have gradually adjusted up to reflect the tight market conditions. And we expect the gap between contract pricing and spot pricing to narrow over time.

For the September quarter, we expect to see relatively stable prices in lithium chemicals, carbonates, and hydroxide and a continued increase in spodumene prices, although not as much as what was experienced last quarter.

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 Instructions]. Your first question comes from the line of Joel Jackson from BMO. Joel, your line is now open.

Q – Joel Jackson

Hi, good morning. And good evening. A few questions. Maybe I’ll go one by one. You’re guiding to similar lithium pricing from all the rows in the September quarter versus the June quarter, so let’s say around 41,000 a tonne. That seems from the outside of your very low realization considering what lag prices might actually be in September. Can you help us figure out what’s going on from a mix perspective? Have you locked any pricing on fix now? Are you being conservative?

Martin Perez de Solay

Thank you, Joel, for your question, Chris, if you could please answer that one.

Christian Barbier

Yes, thank you very much Joel. Look we — the first thing is, we have a variety of different lithium carbonate prices of specifications. And the spot price that you see is the price for battery grade and technical grade is a lower price. So we have been selling in the last quarter about 50% technical grade and 50% battery grade.

The second part of the answer is that, we are selling on contract price indices, which have not yet brought up with the spot prices. Having said this, I think you may remember some of the announcement that we made earlier in the year, we haven’t recorded the fixed price contracts that we had at the beginning of this year. And this is why you’ve seen pricing increase in the second — first and second quarter.

Joel Jackson

Okay. If spot prices all stay flat from here. Let’s just call it $70,000 a tonne for battery grade. Okay. In China and whatever else, then, what should December quarter pricing look like?

Martin Perez de Solay

Well, at the moment, we do not see any reason for prices to come down there is strong demand from OEMs and from cathodes and from battery producers. We see most people very interested in securing supply, and not particularly concerned about the increase in prices that have happened over the last few months. So, there is no — I can’t make any prediction on future prices. But at the moment, we see strong demand definitely and no reason we see any decreases.

Joel Jackson

I’m giving you the forecast, I’m saying that spot prices stay exactly the same today, as they are for many, many, many months. And should you see a much higher Allkem price realization in the December quarter versus the September quarter.

Martin Perez de Solay

We always see a continued gradual increase in our weighted average price. And again, Joel, please bear in mind that half of our sales are made in technical grade at a lower price. Now the $70 that you quote for battery grade are related to the Chinese spot market, and a lot of our products we sell on contract prices. But you can expect to see a continued — provided that spot prices remain at the same level have continue annual increase of our weighted average price.

Joel Jackson

So a lot of background noise. My next question would be then, if we think about fiscal 2023 production, with all the moving parts, I appreciate there a lot. What would you say would be expected fiscal 2023 production for battery grade carbonate, packing grade carbonate, hydroxide and spodumene?

Martin Perez de Solay

We are not giving guidance at this stage on overall production for ’23 as specifically not given in the previous year, particularly because we will be ramping up on stage 2 in the in the second half of this financial year. But for stage 1, we are thinking it’s going to be along the same lines, what we saw in financial year ‘22.

Joel Jackson

Okay, that’s helpful. Then my last question would be, inventory situation in China. What is it like? We know that we had very little inventory of lithium in the inventories — in the system? Is it now a bit better? And I also ask the question, which is, if lithium inventory is just a little bit better, but it goes up from being basically zero. Does that take some of the pricing power from the suppliers, like just having a little bit of inventory in the system versus having none, because they have a standing pricing now, does that make a big difference in the pricing power producers like yourself have?

Martin Perez de Solay

Christian, could you please take that one?

Christian Barbier

Yes, I’ll take this one. Well, Joel. I think the lockdowns that occurred in China around Shanghai and in China in April give part of the answer. There was a softening of the price of the carbonates and hydroxide price in China fairly relative during the month of April, but demand has picked up in May and June to previous levels.

So stocks in China are still pretty tight. And demand also in Korea and in Japan is very strong at the moment. So again, the buying power — I’m not sure I would measure it like this. The demand from OEMs remains quite strong and everybody in the supply chain and we’ve seen that at the beginning of — at the end of June as the first conference where everybody gathered since the end of COVID. Everyone was there and across the supply chain the production of lithium was being consulted by everybody three times over in the supply chain from the cathode, the battery and the OEM producers.

So, basically what is driving the demand is the growth in EV registrations EV sales and this will continue. The lithium industry is trying to catch up with demand and there’s — the demand is so strong, that all the projects that are coming out are necessary to meet demand.

Joel Jackson

Thank you very much.

Operator

Thank you. Your next question comes from the line of Reg Spencer from Canaccord. Reg, your line is now open.

Reg Spencer

Thanks. Good morning, Martin and guys. Thanks for the presentation today. I just wanted to follow-on from Joel’s question on pricing. If I look at Asian metal, FOB Chile, prices are being reported at $60,000 a tonne, China’s spot pricing, whether it’s technical grade, or battery grade, somewhere between $60,000 and $70,000. And you guys are guiding to highest spodumene prices again in the September quarter. How do we — is this — again, I don’t mean to labor as a point. But is this really just a product mix issue that difference between what you’re suggesting its flat price and Q-on-Q and where the rest of the market seems to be trending too?

Martin Perez de Solay

Thank you, Reg. I’ll let Christian explain more in detail on that. My quick answer to that is it’s a mix of product mix and contract duration and contract tenure. Christian, please expand on that one.

Christian Barbier

Yes, absolutely Martin. And Reg I would add to this, that there’s some inertia in our contracts. So when prices increase, there’s a lag for us to see the increase in our contracts. But again, I mean, I can’t really comment on the FOB Chile price. But the spot prices that you see in China, like for all these statistics, they’re not representative of the whole markets of the weighted average price of all transactions in the market.

Reg Spencer

Okay, thanks very much guys. I am not just sure that across to and maybe once to Neil with the, if he’s there. We can see that Argentinian inflation is running quite high. I think last time I looked at was annualizing up 75%. And that does appear to be outpacing the rate of depreciation in the peso. Can you remind me how much of your cost of dollars are denominated in Peso and do this disconnect between inflation and Peso depreciation, then we can expect some upward lift on costs over the next little while?

Martin Perez de Solay

Reg. Yes, I mean, just in terms of the splits for all intents and purposes, about 50-50 split USD versus peso. And in terms of increased costs, that’s why you see our costs are remaining, which we’re keeping under control, to the best extent that we can with a big focus on them in the low 4000s. But we are seeing energy, labor, et cetera. And other reagents increasing.

So, whilst there is a focus to keep a lid on costs to the best extent possible. There are certain things that are out of hand, as I mentioned, energy labor gas. As you mentioned, inflation is up running devaluation. And when that’s over time, we’ve seen devaluation catching up with inflation, but we haven’t seen that for the last 18 months [indiscernible].

Christian Barbier

Sorry, Martin, you go.

Martin Perez de Solay

Alright, no, I was going to tell that in spite of the significant by inflation that we’ve seen, and some of energy and region costs going up, we’ve seen us being able to keep a stable production and you know, pretty reasonable cost evolution throughout this difficult situation in the market.

Reg Spencer

Yes, understood. And I presume it’s too early to say how long this situation is going to persist for obviously, there’s some global macro-economic factors at play here that which are which are obviously outside of your control. But needless to say, costs are probably going to be a little bit higher over the at least the short term?

Martin Perez de Solay

Yes. That’s how we see it, Reg, exactly.

Reg Spencer

One last question for me if I may. At Mt Cattlin, are you able to provide a yearly strip ratio profile for us over the next couple of years? If I look at your cash cost guidance at Cattlin next year, obviously you’ve got some disruptions from COVID labor availability you suppose energy costs are higher. Just wondering if you can help me out in connecting the dots and with some strip ratio guidance?

Keith Muller

Sure. Morning Reg…

Martin Perez de Solay

Yes, I would like Keith Muller — yes.

Keith Muller

My apologies.

Martin Perez de Solay

Hey Keith you can go ahead.

Keith Muller

Yes, Reg. for FY ‘23 the stripping ratio is 12.7. We compare that to FY 22, where the stripping ratio was about one in six. So quite a significant increase as we bring that northwestward down as we move into FY ‘24, the stripping ratio reduces to a one in two again, so really over the next 12 months is when we see a very significant effort in pre strip. And that almost diminished to nothing in the following year, as we didn’t have opened the entire ore body in the northwest, but…

Reg Spencer

Okay, excellent. And in terms of your mining unit rates there, I guess doesn’t really matter, given the margins that Cattlin is so strong, given where current spodumene prices are but you are seeing some upward pressure on those unit rates at Cattlin and added when you go through such a high strip period. And you expect that to normalize as we move beyond FY 2023 into ’24?

Keith Muller

That a unit rate for mining as a single activity is actually reducing due to the increase in mining volume. The unit cost on $1 per dry metric ton produced associated with the mining activity. Absolutely, yes, there’s a significant increase in that. And largely, the bulk of the increase in operating costs we’re seeing in FY ‘23 is purely associated with this increasing stripping ratio. So as the stripping ratio reduces to one in two in FY ‘24, we anticipate the unit operating costs to follow suit. And that will come back down to about $300 to $380 a tonne in FY ‘24.

Reg Spencer

That’s very useful guys. Thank you very much. I’ll pass it on.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of David Deckelbaum from Cowen, your line is now open.

David Deckelbaum

Good morning, Martin. Thanks everyone for the time today. Perhaps if I could just go into the weeds a little bit on Mt Cattlin. I understand the guidance and it was quite helpful around cost per tonne coming down in ‘24. Curious as you guide the fiscal year, volumes for next year of about 165,000 dry metric tonnes. That’s using assuming a lower ore grade obviously of 0.93% to 0.94%. The guidance for ‘24 is at a 1.17% rate. You also mentioned in the release that you’ve increased your mining capacity there. So should we be assuming that there’s greater dry metric tonnage in fiscal ‘24 relative to ‘23?

Martin Perez de Solay

Keith, please if you could answer that one?

Keith Muller

Certainly. Thanks for the question, David. Yes, this is direct correlation between heat grade and spodumene production. So in both fiscal year ‘23 and ‘24, the mill is running at full capacity. So we processing 1.8 million tonnes of ore in both those financial years. So with a higher head grade in FY ‘24, of 1.17%, compared to the 0.94% in ’23, we do expect to see that incremental increase in spodumene production. It’s a twofold win for us not only do we get better metal recoveries at a higher head grade, but there’s also more metal into feedstock that we can then beneficiate. So yes, we do expect ‘24 spodumene production to increase in relation to the higher head grade.

David Deckelbaum

Okay, that’s quite helpful. Thank you for that guidance. And just to understand more around the extension of mine life programs at Cattlin, you have data from the drilling program at the end of this calendar year. When would we expect results from that program to be implemented into the mining process? Is that the reality for a fiscal ‘25 program? Or how do we think about the program beyond ‘24 at this point?

Keith Muller

Martin, you okay if I take that.

Martin Perez de Solay

Yes, please.

Keith Muller

So that’s right, we’ll have the results from the current resource infill drilling by the end of this calendar year. And that will enable us to finalize and formulate a feasibility study to get to FID, very early next calendar year. So around March, we would be looking to guide on whether an expansion beyond the current life of mine, which is towards the end of 2025, whether that’s going to push out.

What we anticipate and as we released in our strategic day in April, is that this current infill drilling we’re doing will push the mine life out to 2028. And then over and above that, we’re also looking at brownfields areas around the existing facility for an underground — potential underground operation post 2028.

David Deckelbaum

Got it. And just the last one for me to so I understand from an operational perspective. The addition of mining equipment, loading facilities, and the like, is that merely to help with the strip ratio going into ‘23?

Keith Muller

Look, if we didn’t lose this mining volume in the last six months, as we work through COVID restrictions and a tight labor market, we probably wouldn’t have increased the mining fleet. So what we are doing with increasing mining fleet and also adding an additional mining contractor to diversify our risk profile, that’s just to catch up on some of the loss volume. So we have a continuous all supplied through this coming financial year.

David Deckelbaum

Thanks for the clarification and the time today.

Operator

Thank you. Your next question comes from the line of Hayden Bairstow from Macquarie. Hayden, your line is now open.

Hayden Bairstow

Hi, guys, just a question about Argentina. I mean, obviously, the inflation the FX is moving around, just keen to understand what you’re seeing on broader inflation given there’s a lot of increased in activity in Argentina and how you’re tracking CapEx and if you’ve got any concerns going forward as activity in that country steps up, whether you can complete these expansions that have as you’re traveling?

And also, can you provide any comments is on the government’s capacity to continue to push through all these approvals given, as I say activity and the amount of projects that are sort of arriving and being planned are starting to increase? Thanks.

Martin Perez de Solay

Well, thank you Hayden for your question. With regards to the overall inflation situation in Argentina, it’s currently stable at a number Reg was mentioning, look like market forecasting 60% 70% of inflation in the year and the catch up of reconversion of the effects rate is going slowly. As Neil was mentioning, we are being able to continue with our investment profile. And we are hedged from an investment perspective, because with our exports are being used to pay the inputs on the CapEx programs and the local expenditures in personal terms are somehow matching the inflation with the devaluation of the local currency.

In terms of approvals, we do have all approvals in place to continue with our expansion projects in order and the construction of Sal de Vida. So we’re not sure whether that answers the second part of your question, but thanks that was the government was going to be able to issue all required approvals.

Neil if you want to complement something on the local effects currency and inflation situation?

Neil Kaplan

No, no. The only thing I’ll add is, we’ve managed that very carefully on the ground, as my team knows better than anyone [indiscernible]. But just in terms of our CapEx, yes, we locked — we’re locking in a lot of the items in US dollars and early — as early as possible as well, so long of the — a lot of the longer lead items have been locked in earlier. And everything’s USD based and given we’re USD based company with all our sales in USD, we are protected from that perspective, just the peso costs, which we’ve got to manage, which there’s an extreme focus on the entirety.

Hayden Bairstow

Okay, great. And just on James Bay, he just provided an update on how the older process is going now, are we seeing any sort of headwinds within Canada in terms of pushing through all the required approvals and everything?

Martin Perez de Solay

More than that, I’d say we had some headwinds in the last few months with the strike of engineers in Quebec, that somehow delayed the preparation of government [ph] meetings now, meetings with the [indiscernible] body between the Cree Nation and the provincial government of Quebec expect schedule to happen during the month of July, and we expect to start to see some tailwinds as the strike of engineers in Quebec has terminated and thanks for returning back to normal on that front.

In the meantime, we’ve been able to continue to progress in engineering and the progress in the purchase orders for long lead items and securing contractor for everything that we need to start the construction in the first quarter of the next calendar year.

Hayden Bairstow

Okay, great. I’ll leave it there. Thanks for that.

Operator

Thank you. Your next question comes from the line of Matthew Friedman from MST [ph] Financial. Your line is now open.

Unidentified Analyst

Sure, thanks very much. Hello, Martin and the team. Just wanted to follow-on on Hayden’s question about the project construction environment in Argentina, obviously, a huge number of projects are in various stages of development and completion. So really just wondering what sort of challenges if any, you’re having, particularly sourcing, construction workforce, technical expertise, rigs, or drilling wells, pumping equipment, or any other specialized equipment, presumably, all of those things are in pretty high demand, and then probably compounded by COVID, and supply chain issues. So just wondering if you can expand on where if anywhere, you’re having challenges and how you’re managing the critical path timeline for the projects you’ve undertaking?

Martin Perez de Solay

I think this is not new for you. It’s constructing in this industry is challenging across the board. So to split the problem in various parts. I’ll tell you what we are doing and how are we managing it? First of all, we announced this quarter with significantly strengthen our management team with three new positions, particularly with regards to project we’ve got in James Connolly, with a wide experience in project engineering and development coming from very senior positions in Vale Base Metal. James is helping us to improve our engineering designs on our readiness to construct.

In terms of construction itself to form, so we’re constructing currently in Argentina and getting ready for construction in Canada and Japan plant is already constructed. And we’re already starting to decommission the finalizing testing and starting commissioning phase.

In Argentina, we are 88% plus progress in Olaroz. And we’re about 30% progress in the construction of the ponds in Sal de Vida close to 15% overall project. So we are shifting some contractors and experience from Olaroz to Sal de Vida and that enabling us to continue to manage the experience that we’re in Olaroz and deploy that in Sal de Vida.

Also, as we said before, we’re bringing in and education into the lithium industries, from other industries that are compatible to our, particularly chemical industry and oil and gas industry that have been quite large industries in Argentina, somehow have reduced the level of activity of the primary good professionals into this industry.

In Canada, we teamed up with a local engineering contracting firm in Quebec that is helping putting together all the necessary contractual arrangements with our team in the office of Quebec. So the way we are managing the risks of construction project is by localizing our workflows, and taking advantage of the local capabilities and also taking advantage of the knowledge that we get in the different projects.

With regards to particular situations or challenges to construction, Argentina, I will tell you that they don’t go beyond what we just discussed. And the fact that we are very well progressing and also helping to leverage construction at Sal de Vida from the experience and the contractors in Olaroz. It has been very helpful. And I think that puts us ahead of other projects in the region.

Unidentified Analyst

Yes, thanks very much Martin. Your last comment that I picked up on what my follow-up question was going to be, which is, have you heard or is there anecdotal evidence of some of the other projects in the region being particularly challenged by some of these issues and conversely is outcome in your view, better position, because of some of those factors that you’ve highlighted.

Martin Perez de Solay

Instead of that I think we’re better positioned than other competitors in the region to be able to contract basically, because we’ve been constructing and delivering projects for quite some years by now.

Unidentified Analyst

Yes. Great, thanks. My only other follow-up question was on Mt Cattlin, and particularly on recoveries, clearly in the June quarter, part of the drop in production and also the step up in unit costs was because of that stepped down in recovery. You highlighted basalt, in the snowfalls as a contributor there. Can you talk a little bit about the impact of wellhead grades also, and particularly as we look into FY ‘23 guidance, for run some rough numbers, guidance seems to reflect an improvement in recovery back to that sort of 55% to 60% range? But clearly, you’re also got into a lot of head grades.

So I guess the question is, are you confident that recovery will improve back into that range? Are you confident that you can solve the issues also, despite the impact of a lower head grade?

Martin Perez de Solay

Keith, can you please comment on that one?

A – Keith Muller Yes, certainly. Thanks. Matt, I think one of the biggest things that we realized this quarter was that low grade stockpiles that contains the basalt is something that we probably wouldn’t have processed until the end of life. The reasons we reverted to processing that feedstock is to keep the mouth full and capitalize on the current pricing mechanisms that we have in the market.

So with the delay we’ve had in stripping, we were forced to go and process that lower grade vessel containing stockpile. So to answer your question is as we recover, and we enable pre stripping to take place in North West, we will divert away from processing that lower stockpile. So yes, we expect recoveries to return to that 55%, as we start processing clean, uncontaminated, all.

Unidentified Analyst

Got it. Thanks, Keith. But obviously, with lower head grade forecast in FY ‘23, I’m assuming that some of that is still a component of that low grade stockpiles. And really, the benefit of stripping probably doesn’t help FY ‘24 or late FY ’23?

Keith Muller

That’s right. So if I can just give you two data points to sort of draw correlation between recovery and head grade. So if we look at a, say, a 6%, on a product grade, at a 1.4%, head grade, you’re looking at a recovery around 62%. Whereas at a 1% head grade, that material will only recover at about a 56% head grade. So yes, some of the lower recoveries is associated with the lower head grades just due to the great recovery curve.

Unidentified Analyst

Okay, that’s helpful. Thanks very much, Keith.

Operator

Thank you. Your next question comes from the line of Lachlan Shaw of UBS. Lachlan, your line is now open.

Lachlan Shaw

Thanks very much team, great update. So just looking at Mt Cattlin Catlin for a moment, June quarter costs just touch over $800 per tonne, almost double FY ‘22 average, but you’re guiding to FY ‘23 cost to be up a fair bit. Is the June quarter data points a good starting point for early FY ’23 in terms of costs, or should we be thinking about a little bit less than that?

Keith Muller

Yes, I think that’s a good starting point to estimate the costs going forward. In the June quarter next year. So 2023 is when we will see the cost reduce again, I think before I mentioned in FY ‘24, we expect the unit operating cost of back at the free 80 levels. So it is just a stripping that we are doing in the next nine months that’s pushing that cost up, or other costs related to the operation has had very minor increases that relates to inflation.

It’s really the mining costs that seen this significant increase, as you mentioned, almost doubled in unit operating costs. So it’s a bit of — it’s the perfect time to do this. We wouldn’t have been able to do this 18 month ago. So we just capitalizing on the current market prices to get pre stripping and to get the higher stripping ratio bits out of the way.

Lachlan Shaw

Got it. Understood. And then just on to follow-on. So no guidance FY ‘23 in terms of production has been pointed out earlier because of the ramp up of stage 2. How should we be thinking about that last time you guided on that you were saying 12 to 18 months ramp up to 25,000 tonnes name plate from first production end of 2022? Is that still how you’re thinking about it? And I guess just wondering why the guidance has been removed?

Martin Perez de Solay

Indeed, just that’s the way, I think, allotted into the same guidance in terms of one that we gave before and very similar from what we saw this year for stage 1.

Lachlan Shaw

Okay, understood. Thank you. And then my final question, if I may. So we’ve talked before about carbon pricing, the spread between technical grade and battery grade, noting, sales split of roughly 5050. What’s your observation on that spread is at a constant dollar per tonne amount? Is that a percentage of the battery price? And I guess, is that spread changing, given all of the shifts in broader pricing and market dynamics recently?

Martin Perez de Solay

Christian, I let you to answer that one, please.

Christian Barbier

Yes, Lachlan, look, it’s a fair question, the spread is not a fixed premium, it fluctuates as per demand generally, you probably would be well versed to say it would be about $15,000 a tonne. But it really depends on the supply and demand. And ultimately, most of the demand comes from the battery. So people upgrade carbonates into either hydroxide or into technical grade — sorry, battery grade carbonates.

So ultimately, when the market stabilizes over the next few quarters and months, we expect to see battery grade significantly or consistently higher than technical grades. But again, month on month, it depends on the supply and demand and especially in China.

Lachlan Shaw

That makes sense. Thanks again. Thank you.

Operator

Thank you. Your next question comes from the line of Kate McCutcheon from Citi. Kate, your line is now open.

Kate McCutcheon

Hi, good morning, Martin and team. At Olaroz for stage 2 production in the back end of this FY. I guess at the investor day in April and even last quarter, you’d said first production in this current hub that we’re in now. So what’s driving what are the key reasons that the delay here what’s happened between last quarter in this month that that’s that first production, stage 2 has been delayed?

Martin Perez de Solay

We are continuing to progress with the construction of Olaroz, as we’ve highlighted in report. There are some disruptions in the transportation industry that Cauchari basin some equipment arriving. So we’ve been a bit more conservative in terms of the climate will take us to complete the project. But we’re still maintaining our guidance that we’re going to get some production at the end of the second half of this year, which is what we are doing.

Kate McCutcheon

Right. Okay. So I have to clarify first production the end of CY?

Martin Perez de Solay

Yes, we have CY.

Kate McCutcheon

Okay. Understand. And then just on Cattlin guidance, two questions. Is all of that white stripping that you’re doing sitting in OpEx? And secondly, can you give me an idea of how much the June quarter costs and guidance the next year? Is cost inflation? Any metrics you can point to that?

Martin Perez de Solay

Neil, can you please update on that?

Neil Kaplan

Yes. I mean, on the first point that you asked it’s not all sitting CapEx. What we’re doing is capitalizing the burden and that’ll be released as we produce. So it’s not all in CapEx, it is a portion of that’s in CapEx but not — sorry in OpEx, I should say, in OpEx, but the rest is being capitalize and will be release as production occurs.

But it’s in quite a short period because the mine life. So it’s not that it’s over very long periods that it occurs. It’s capitalized upfront and released fairly quickly.

Keith, I don’t know there was a second question, I think you can.

Kate McCutcheon

About the cost of Cattlin, for about $800 a tonne. Do you have an idea of what dollar per tonne is like a diesel increase or labor?

Neil Kaplan

Keith, so, but go ahead if you’ve got I mean, sorry, I just missed the question. I can pick that up as well, unless you want to go. I mean, it’s just from — sorry, Keith, I’ve got across you. But it’s, there’s been loads of production volume and lowered recoveries we’ve mentioned is the strip ratio to an extent as well as the skilled labor issue in WA.

Keith, I don’t know, you’ll be close to being at the mind to add anything that I haven’t covered.

Keith Muller

Sure. Kate, I think if I can get back to you have an exact number, but I take your question as you’re trying to get a feel for what is related to the increase mining volume, and what is related to general inflation. So if I can just give you a bit of a flavor of that, I suggest that almost 80% of the cost is associated with an increased mining activity. And a very small portion is associated with the increase and inflation due to general higher cost of consumables like fuel, ammonium nitrate, and other reagents that we use. So very small component is associated with general inflation.

Kate McCutcheon

Okay, and so why are you saying better than peers? Have you got diesel hedge still? I mean, you’re moving a lot of tonnes or is it the contracts?

Keith Muller

Sorry, can you clarify that question, Kate. I don’t understand what are you asking?

Kate McCutcheon

Well, a lot of our peers, even today have come out, citing huge increases just in diesel alone in terms of dollar per tonne numbers and also for labor, but it seems like you’re faring a bit better. So is this the way your contracts are written? Do you have some diesel hedged there or you’re just not seeing?

Keith Muller

Sure. So no, we don’t have any diesel hedged. I can’t compare with our peers. I haven’t done a proper evaluation of why they are citing much higher inflated costs. To give you again, a feel of diesel, we consume about 12,000 liters of diesel a month. So there’s about an $18 million increase due to diesel, over $180 $190 million spent over the financial year. So that is that’s probably the most significant consumable increase that we’ve experienced, because we also use diesel for our power generation.

Kate McCutcheon

Okay, thanks for the color.

Operator

Thank you. Your next question comes from the line of Glyn Lawcock from Barrenjoey. Glyn, your line is now open.

Glyn Lawcock

Good morning, Martin. Just going back to Mt Cattlin, just on a couple of aspects. Back in June, you’re guided to $5,000 a tonne for the spodumene on SC sixth grade, but you received it on SC 5.4. Was that that’s effectively a 10% lift. Was that just better pricing in the month of June that you got or discounts narrowing.

And then just while we’re on Mt Cattlin, just the guidance for ’23, does the spot grade production, you produce 5.3 product in the quarter of June, given you’re going through the stockpiles, et cetera. Should we expect a low grade spot in fiscal ‘23 and then it bounces back in 24? And just what effects right is assumed in your cost guidance as well? Thanks — to Mt Cattlin?

Martin Perez de Solay

Thank you, Glyn, for questions. I’ll ask Christian to answer you on the pricing and with regards to recovery rate. [indiscernible] recovery rates are basically associated with the head grade that was tracing the mine. Christian and Keith afterwards quickly. We’re running out of time.

Christian Barbier

Yes, thanks, Martin. Well, Glyn, yes, we did achieve a bit better price than what we expected as earlier. The spot prices for spodumene have increased and we’ve managed to take advantage of the fixed price lower than subscription grade.

Glyn Lawcock

Okay, thanks.

Keith Muller

Glyn, if I can just bridge that last question you had that relates to product grade and whether we’re expecting to see the same 5.3 5.4 for the financial year coming. No we don’t. For the next quarter we will see a lower grade, as we move into those lower grades stock piles, but from the December quarter onwards, we can return to any grade we wish to produce from 5.5% up to 6% at our customer’s demand. So it’s not a long term situation we find ourselves in.

Glyn Lawcock

Okay, thanks, Keith. And the FX rate for this year. Maybe that’s one for Neil.

Neil Kaplan

FX rate for the year, we’ve assumed is $0.70 to the U.S.

Glyn Lawcock

And if I quick just in order of time. Neil while you’ve got the floor, the export tax you lifted out of the release, do you have that handy what the export tax was in the quarter for others?

Neil Kaplan

I might have to ask Andrew, if he has that. I don’t have that at hand. I don’t have that at hand. Glyn I can come back to you afterwards. If you just send that to me, I’ll come back to you on what the export duty was per tonne?

Glyn Lawcock

Alright, thank you very much.

Operator

Thank you. Due to time constraints, we will be closing question and answer there. And I would like to hand back over to Martin for closing remarks.

Martin Perez de Solay

Thank you very much, Paul. At the end of our financial year, I am very happy to report that integration of recovery with Galaxy has done very well. Significantly — significant value has been delivered by combining the two businesses on set of assets. Such that Allkem is a unique is in a unique and robust position to capitalize on the growth in the lithium market.

We have applied an exciting strategy to deliver the scale and product traceability required by the customers. But the world transitions to another economy. In achieving this we must also continue strong operational performance, investing in our people, developing our assets in a sustainable manner and managing costs in this inflationary environment.

Further, we return a robust financial position with strong positive cash flow over the quarter and financial year that will fund the tripling of our production by 2026. Thank you for joining our quarterly results briefing today. If you have any further queries, please don’t hesitate to contact our Investor Relations team. Thank you.

Operator

Thank you for joining. You may now disconnect.

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