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Edited Transcript of ORE.AX earnings conference call or presentation 17-Apr-19 12:01am GMT

Q3 2019 Orocobre Ltd Earnings Call

MILTON, QLD Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Orocobre Ltd earnings conference call or presentation Wednesday, April 17, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Hall

Orocobre Limited - Business Development Manager

* Martin Perez de Solay

Orocobre Limited - MD, CEO & Director

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Conference Call Participants

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* Adam Baker

Global Mining Research Pty Limited - Mining Analyst

* Andrew Hodge

Macquarie Research - Research Analyst

* Bria Murphy

BMO Capital Markets Equity Research - Associate

* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Nick Herbert

Crédit Suisse AG, Research Division - Research Analyst

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* Reg Spencer

Canaccord Genuity Limited, Research Division - Mining Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Orocobre March 2019 Quarterly Market Update. (Operator Instructions) I would now like to hand the conference over to Mr. Martin Perez de Solay, Managing Director and CEO.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [2]

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Thanks, Jessie, and I would like to welcome you all to Orocobre's quarterly activities briefing for the March 2019 quarter.

I would like to open the call with some comments on safety. Unfortunately, an incident occurred at Olaroz and another one at the Sijes mine of Borax during the quarter with each resulting in a lost time incident being recorded. At the end of March, the Tincalayu mine at Borax had achieved 704 days without an LTI and Campo Quijano had achieved 387 days without an LTI. Prior to an LTI being recorded at the Sijes mine during February, the site had achieved a record of 1,249 days without an LTI.

An improvement road map was developed by DuPont at Olaroz following an in-depth safety audit to address the key risks and priorities to improve the safety performance. The company and DuPont are continuing to work together to develop and foster the company safety culture.

Moving on to the results for the quarter. The Olaroz lithium facility saw total production of 3,075 tonnes, which was the best March quarter we have achieved to date. 3,075 tonnes is an increase of 10% when compared to previous corresponding period following our pond preparation and continued strategy of managing brine quality.

During the March quarter, rainfall exceeded the same period in 2018 and 2017, resulting in lower evaporation rates. As reported, there were no material production stoppages, no reduction in the import of supply or export of finished products. Production for the year-to-date is 9,150 tonnes, and as previously reported, Orocobre expects full year production to be approximately the same as financial year 2018, which was 12,470 tonnes.

Quarterly sales revenue was $33.4 million, which was up 4% quarter-over-quarter with a realized average price achieved of $9,451 per tonne on a free on board basis. March quarter product pricing was below that of December quarter due to both direct and indirect impacts of China's prolonged market softness. Sales volume for the quarter was up 17% quarter-over-quarter to 3,530 tonnes.

Gross cash margins excluding the Argentinian export tax of $5,258 per tonne were down 20% quarter-over-quarter due to the lower average price received. Cash cost for the quarter on cost of goods sold basis were $4,193 per tonne, up 6% quarter-over-quarter and down 4% on previous corresponding period excluding the recently announced export tax of $776 per tonne.

Operational strategy has focused on safety and quality. Special attention is being devoted to improve the lithium grade of brine feedstock. Improving the brine quality has multiple effects, including higher lithium recoveries, lower cost of production and increased product quality and consistency. Following rain in January and February, battery grade production was temporarily suspended while brine quality recovered during March. Customers requiring battery-grade lithium carbonate were supplied for inventory during this period. Production of battery-grade lithium carbonate will recommence during the June quarter.

Moving on to the lithium growth projects. Subsequent to the end of the quarter, we were excited to announce that Orocobre, Toyota Tsusho Corporation and joint venture boards have approved the final investment decision for the Naraha lithium hydroxide plant to be built in Japan. Orocobre will hold a 75% economic interest in the project with operations to be managed by TTC. The construction of the Naraha lithium hydroxide plant will further cement our position as a global lithium chemicals producer operating at the bottom quartile of the lithium cost curve. This plant is the first of its kind in Japan and will provide for us product diversification suitable for the different battery technologies and the potential for significant margin growth on our primary lithium carbonate being converted to battery-grade lithium hydroxide. Construction of the Naraha lithium hydroxide plant is expected to commence during the first half of calendar year 2019 with commissioning to commence during the first half of calendar year 2021. Construction of the key items of Stage 2 expansion of the Olaroz lithium facility such as pond, secondary liming plant, roads and camp upgrades have also continued to advance throughout the quarter.

Moving on to Borax Argentina. We saw overall sales volume in the March quarter increased 21% quarter-over-quarter, 44% on previous corresponding period to 13,041 tonnes, which included a sale of 2,312 tonnes of low-value mineral. Excluding this mineral sales, the result is in line with the December quarter for 2018. Sales revenue was up 4% quarter-over-quarter and average price received was up 3.5% quarter-over-quarter after adjusting for the low-value mineral sales.

On the corporate side, Orocobre released the 2018 sustainability report during the quarter, and as I was quoted at that time, it has quickly become evident that my predecessor's, Richard Seville's, commitment to the share value program at Olaroz established an enviable culture based on understanding and analysis, operational excellence and sustainability. This is something that I am confident we can further develop in the future.

At the quarter's end, Orocobre corporately had $265.7 million of available cash after expenditure mainly related to expansion activities, Naraha lithium hydroxide plant basic engineering, corporate expenses, Cauchari joint venture expenses, Borax working capital and debt repayments, which was partially offset by interest income. Including Sales de Jujuy and Borax cash and project debt, our net group cash is currently $192.9 million.

Moving on to our Cauchari joint venture. During the quarter, Advantage Lithium released the updated resource estimate for the Cauchari joint venture property. The updated resource estimate has more than doubled from the previous resource announced in May 2018 to 4.8 million tonnes of lithium carbonate equivalent of measured and indicated resources contained in 1.8 cubic kilometers of brine and 1.5 million tonnes of inferred resources. As I said, when this resource update was released to the market, it is clear that our joint venture partner, Advantage Lithium, had delivered a well-designed and well-executed resource definition program. This result, which has more than doubled the total Cauchari resource, provides us with a great opportunity to reassess future development options to maximize the value for all shareholders.

So overall, this has been another good quarter for Orocobre with a solid operational result, the approval of Naraha and progress on the Olaroz expansion.

I will now hand back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Andrew Hodge from Macquarie Group.

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Andrew Hodge, Macquarie Research - Research Analyst [2]

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I just wanted to check to see on, I guess, like pricing as well as future production guidance. You guys are now saying that you're going to be achieving the same production levels approximately as what you did in FY '18. And I think you've just kind of touched on then about the operational update. Can you give us a sort of a sense for what you think is, like I said, a sustainable run rate? I mean, obviously, things will change quarter-on-quarter. Obviously, as you said, this Q3 was very strong, but just to get a sense of how kind of things going ahead will look like.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [3]

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Well, thank you, Andrew. As you said, the production on a quarterly basis is going to be seasonal and adjusted for climate variations. We continue to expect the same production as we had last year for the current financial year. And regarding future years, we're currently working on understanding better the performance of the plant and then pond system sales as we are building new pond for the Stage 2 for the expansion of the plant. So on due time, we will look into providing a guidance on future years' production. Yet it's difficult at this point in time to tell you something like a sustainable rate on a quarterly basis since it's highly impacted by seasonal weather conditions.

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Andrew Hodge, Macquarie Research - Research Analyst [4]

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I guess I was just trying to look at given the new ponds that are coming online, I'm just going to work out what's kind of the right way to kind of think about what's kind of an effective utilization of the plant going forward before the second stage plant comes online.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [5]

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Basically, we are building the ponds ahead of the second stage. However, it takes about 9 to 12 months for the brine to concentrate as it goes through the ponds. We're growing ponds capacity by 200%. We're growing nameplate capacity at the plant by 150%. So overall, we'll have more pond area available for production. Particularly, we would see the largest impact of the new ponds being built. We should expect it for the fiscal year 2020. And then as we operate the expansion on the current plant jointly, we should see an improvement as well. Difficult, I'm sorry, to tell you now an exact figure of how much that increase in production could be.

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Andrew Hodge, Macquarie Research - Research Analyst [6]

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Okay. And next one is just going to be about in terms of pricing just, I guess, to get a sense of how much you guys are kind of contracted for this calendar year at the moment and just if you can give kind of an indication of how you think things are going to progress throughout the rest of the year.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [7]

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On pricing, we said that we continue to see volatility and short-term adjustments in the market. It is very early in the quarter to release numbers, but we expect a lower pricing for this quarter based on the current shipments that we have for the quarter. We see it in the range of 8,200 based on current shipments that have already been agreed for the quarter. But we will provide a further release once we get more into the details of the quarter with more order.

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Andrew Hodge, Macquarie Research - Research Analyst [8]

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Okay. And last question is just about in terms of debt financing. You guys had talked a bit about the Naraha financing last week, but just to get a sense about how the proposed debt funding is going for Phase 2 and when you expect to be able to try and talk about it in more detail.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [9]

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Well, we are progressing on debt funding for Stage 2 as we speak. We expect to have the total debt financing package agreed and signed in detail with the bank. The overall figures had been agreed and the debt financing is available. However, the detailed contracts have not been signed, and we expect to get them done to us mid of this year by the time we release the results.

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Operator [10]

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Your next question comes from Adam Baker from Global Mining Research.

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Adam Baker, Global Mining Research Pty Limited - Mining Analyst [11]

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Just wondering if you negotiated any longer-term contracts with any of your customers with regards to offtake agreements.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [12]

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Thank you. Yes, we are currently working on that. I will divert the question to David Hall, who is in charge of those negotiations, and he's in the call with me.

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David Hall, Orocobre Limited - Business Development Manager [13]

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Adam, we do have some longer-term agreements in place already, and it's a major focus right now. We have a number of longer-term contractual arrangements in varying stages of negotiation, and a couple of those are quite sizable. And we expect to be closing those within the next 5 to 6 months.

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Adam Baker, Global Mining Research Pty Limited - Mining Analyst [14]

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Okay. Great. Also, just wondering with regards to production of the battery-grade carbonate in the June quarter. I was wondering if you could be more specific. You've got a month you have in mind that you'd be producing battery grade again?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [15]

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Well, we hope to be producing battery grade -- not producing battery grade today. The evaporation grade in the first weeks of April was lower than expected and brine quality is recovering. We expect to start producing fairly quickly within -- by the end of this month beginning of the following with purified battery-grade product again.

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Operator [16]

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Your next question comes from Joel Jackson, private investor.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [17]

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This is Bria Murphy on for Joel Jackson. Just a question on -- you spoke on your last call about reviewing your CapEx budget and your time line. Do you have any update there?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [18]

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Thank you. That is regarding the expansion, the Stage 2 at Olaroz. And as we gave the update in the release, we just selected Jacobs as the preferred contractor. We are sitting there with them and negotiating the PCM agreements as well as the pay order for the key parts of equipment. And as we progress with that, we should be able to have a more clear figure in terms of budget and in terms of time line for the project. For the time being, we are keeping the same figures that we have said before. We are not changing them. And once we finalize this work with them, we should be able to do that again. That should come jointly with the release of full year results.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [19]

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Okay. And then just on costs I guess. Can you talk a little bit about the trajectory for cost? And do you see them moving towards your longer-term target of 3,500 per tonne anytime soon?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [20]

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Well, that's our objective for the primary production cost. The cost for this quarter is not 100% primary. We have produced -- 10% of the production was roughly purified that we produced in the month of January. Then we moved on to primary after quality of the brine deteriorated. This quarter is also impacted negatively by lower brine quality which requires a larger amount of energy, if you have to [plant] more brine through the plant, a larger amount of reagent. So we expect to be able to stabilize brine costs closer to the 3,500 range. We are not there yet. We think it's achievable. But it will take some time and effort and also will require a further stabilization of the brine quality.

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Operator [21]

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Your next question comes from Rahul Anand from Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [22]

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Look, I might ask the first one on cost specifically. Just wanted to focus on specifically the devaluation in currency and inflation. I mean, they have tracked pretty closely now. And as the previous person was asking around costs of 3,500 in the long run, just wanted to understand despite the devaluation having taken place, what is holding us up besides brine quality at this point in time. So if in the future let's say in a quarter or 2's time, if there is ample good-quality brine available, should we expect the levels to be at around 3,500? Or is that 3,500 level only achievable once you've hit your nameplate, which is much higher than where you are currently? That's the first one. I'll come back with the second.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [23]

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Okay. With regard to the first one, as I said before, brine quality is very important because it impacts a lot from the recovery rate from the plant and the use of reagents. But as we see production increasing, we should see the costs coming down. Unfortunately, I can't yet answer you whether we need to achieve nameplate as the basis for achieving that 3,500 cost. That's what we target, and we should be able to get there. Obviously, increases in production would result in lower prices as the fixed cost is large. But unfortunately, I said before, I don't have the number of what the plant can produce in a more stable basis and it is difficult to assess it. Yes, we should see it coming down to the target. We continue to have the target. But yet I'm not able to give you an exact date at which we will get there.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [24]

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Okay. And still connected to cost then in terms of working capital, how much of an increase in working capital do you think we still need in terms of additional brine inventories for predictable production going forward?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [25]

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That is yet going to be worked out because once we finalize the detailed time line for the pond construction, we will have the detailed time line for how do we fill in the ponds with brine, how much lime do we use as we fill in the ponds and with also the brine with lime. And that will tell us what the working capital is. I'm planning to be able to release that jointly with the time line for the expansion project by the time we release results of the year.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [26]

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Okay. Excellent. And just I guess final question from me then is around pricing. Just wanted to understand the dynamic between 1Q and 2Q. Andrew asked the question about how you're expecting the price. So I mean you did mention that price probably comes off in the second quarter to around 8,200, 8,400. And you also said that you're going to produce more battery-grade product by -- starting the end of this month. So just wanted to tie that up and sort of understand how come you had a higher price when more primary product was being sold. Is that leftover volumes from last year and that's the reason? Or what other dynamic is at play because I would have thought the price improves if you're selling more purified?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [27]

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Well as I said, this price protection is based on the current shipment order. Perhaps David can comment more on that. But the orders that have already been agreed and signed for the quarter still are predominantly prime. That's why you don't see the impact of the purified product. Perhaps, David, you can comment on that more.

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David Hall, Orocobre Limited - Business Development Manager [28]

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Yes. I think probably one of the other aspects that play in the difference between Q1 and Q2 is that we actually have a larger exposure to the Chinese market in Q2 than we have had in Q1. And that's actually across both product -- purified product going into the battery market as well as prime product into the industrial markets.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [29]

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Okay. Understood. And just finally, I know I did say finally last time, but just in terms of weaker production seasonally Q2 and Q3, how should we think about that? Are you okay in terms of brine inventories as they stand at the moment to step into sort of seasonally lower production months?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [30]

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We should see better productions in the fourth quarter of the year, of the fiscal year, which is Q2 of this -- of the current year. Q3 should be improved as a consequence of maintaining a more stable brine quality. But Q3 will be -- we will give you a guidance when we put together the number for the following year.

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Operator [31]

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We'll now move over to some webcast questions. The first one is what will be the gross margin at Naraha? And the second being when will Stage 1 nameplate of 17,500 [G] be achieved?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [32]

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Well regarding the gross margin at Naraha, we are forecasting currently an OpEx at Naraha of $1,500, not including the cost of the lithium carbonate. For the margin, it will depend on the difference between the lithium hydroxide and the lithium brine quality carbonate, which is the one that we're going to ship to Naraha minus $1,500. That's what will drive the margin of the Naraha plant. Second one on the 17,500. As I said before, I can't yet tell you when are we going to get there because it depends a lot on how can we stabilize and manage the brine quality in the ponds and how the seasonality impacts we're working on, on reducing the impact of seasonality as we speak. And we'll continue to work. We'll take some time to get there.

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Operator [33]

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The next webcast question is with 2 new evaporation ponds built and filled, can you quantify the level of extra production these ponds can contribute in 9 to 12 when the brine is ready for harvesting?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [34]

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That's a lot of question on that one. As I said before, it takes 9 to 12 months to concentrate the brine in the ponds. And as we are building ponds ahead of the Stage 2 expansion, we should be able to use an incremental pond capacity for Stage 1 that should impact positively. I don't have a number, I said before, of how much that positive impact is going to be. The other question deals with the harvesting of the ponds. We already harvested 6 of the 8 harvestable ponds. We are harvesting 2 more. And as we have more ponds available, the ponds will have -- set on a cycle of 3 years, enabling us to reach a better harvesting and pond management over time.

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Operator [35]

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Your next telephone question comes from Glyn Lawcock from UBS Investment Bank.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [36]

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A few questions. Just firstly, you attended that meeting in Argentina that you talked about in the quarterly. Just what sort of initiatives came out of that? What can we expect from the Argentinian government? Just curious if there's anything on the horizon. And was the tax that you're paying currently, which I think is for 2 years, is that likely to stay, maybe be extended? Just that's the first one. Just any thoughts you've got post the meeting. Secondly, just with the lithium hydroxide plant, I sort of -- I know this is before your time, but if we go back to when this was first talked about, it was a 10,000 tonne plant for 30 million. January last year, CapEx went up to 60 to 70. Now it's coming at close to 78. How much confidence now do you have in that, that's the final number? And what sort of contingency is built in? And sort of maybe sort of help me understand why it keeps creeping up. And that's probably all for now, I think.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [37]

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Okay. On the first part of your question, the meeting with the President of Argentina is now focusing more on lithium. The intention was to inform the President to understand which are the bottlenecks that the sector has and how can the government assist. We mostly addressed issues on infrastructure, availability of gas supply, electricity and roads, infrastructure as well as different projects that could be used to reduce the transportation costs of the feedstock that we have to import and of the exported product. Those are the key issues. Regarding the tax, for the time being, the temporary tax seems to be longer than temporary or for quite a long time. It will take some time for the government to remove it. However, as the currency devalues, as it was mentioned in an earlier question, the impact of the tax is being reduced. Remember that is about ARS 30 per exported dollar. That's the way it is nominated. And at the time, the dollar -- the peso to the dollar was at ARS 30 to $1 rate. It is today at ARS 41, ARS 42 to $1 rate. So you see we are already seeing almost a 3% reduction in the tax. If -- and we should continue to see it as the currency devalues. The second part of your question regarding the Naraha plant, well there are many things that have changed. Yes, I don't recall the initial number. But yes, we did work jointly with Veolia to a large extent in trying to make sure that the costs are going to be those. On the increases side, it is important to mention that we added to the plant a kiln oven, a calcination oven so as to be able to reuse the lime that the project has to use in the process. That not only impacts in the lower consumption of lime but also in the lower cost because we don't have to dispose the lime after being used. We can reuse it within the process. That impacted the costs up, has impacted the operational expenses down. Also, I think that you -- the number of 70 that you mentioned of -- 25 that you mentioned is right. You have to take into consideration that there's going to be a $27 million subsidy from the Japanese government, which will make a net cost of the subsidy for the plant of $50.5 million. We feel comfortable that, that includes a contingency within the number, and this is being contracted on an EPC basis with Veolia, and the cost for the capital projects has been agreed and closed. Should there be no modification to the project, the cost should not vary. Variations from the cost are expected from any variation to the process or changes to the design. We adjusted the time we took to review and forecast the design. We don't see them as highly probable of happening. However, we'll keep you updated on any further change that may show up there. In a nutshell, we feel pretty comfortable that we can get the plant done within that number and [live] within the prices on the process as we go through it.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [38]

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And Martin, can I just ask one more question if you can still hear me. Just you made a comment earlier about the margin for the hydroxide plant will depend on the premium hydroxide over carbonate. How do you see that developing though? We obviously have a large number of spodumene players targeting conversion facilities to produce hydroxide in Western Australia. Where do you see that premium going? It feels to me like it could close to almost 0 over the carbonate price. So I'm just curious what you see happening on that front given what we're seeing in WA.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [39]

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We'll give you an answer between 2 parts here. We'll give you the first part, and I will ask Tara and David to update on how do they see the premium evolving. What I think is very important is that the feedstock for the plant is going to be primarily lithium carbonate produced at our Olaroz facility at a low cost. That enables us to achieve a good profit on the lithium hydroxide. But I think David and Tara can explain you more on how we see the margin between both products moving forward.

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David Hall, Orocobre Limited - Business Development Manager [40]

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It's probably not a question that can be comprehensively answered here. But I think if -- looking at the dynamics of the market at a high level when you're looking at the capacity coming in on hydroxide and the projected demand, the outlook on high nickel cathodes for EV use and just looking at general market theory, there could be and may be a convergence between the lithium carbonate battery-grade product prices and the lithium hydroxide battery grade. But as Martin just pointed out, the feedstock for Naraha is the unpurified lithium carbonate product out of Olaroz, the prime product. So there's not only a lower cost of production to that, but there's also a delta, a price delta built into the market for that as well. So I think even if we were to see a convergence of hydroxide and carbonate pricing into the battery market, it's still a situation where the Naraha operation would still be sustainable.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [41]

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Okay. And just while you're answering that then, just your price spread between your battery and your grade and your, I guess, industrial-grade carbonate, what sort of spread is that at now? And are you able to produce an at-spec battery-grade carbonate when the purification circuit's running? Like is there any product quality issues that could stop you from achieving what indices out there suggest as a $12,000 to $13,000 carbonate battery price?

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David Hall, Orocobre Limited - Business Development Manager [42]

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The -- we currently produce a purified micronized product because the battery market requires a micronized product for cathode production. So we can and do produce that. And the product qualifications that we referred to are related to that micronized product, and it requires customers to typically run a production trial continuously for about 6 months in order to qualify that product on their production line to make sure that it does what it's supposed to do, and then you've got a subsequent product testing that usually follows that. In regard to the delta, I mean, it's a little bit different at the moment depending on what markets you're talking about, whether it's China versus non-China, whether you've got product going into a qualification trial or supply it under contract to a battery market customer. I mean traditionally, the delta has been of the order of $2,000 to $3,000 a tonne. So in the long term, I'd expect that sort of delta to remain and perhaps even widen over time. But that depends what happens on the supply side.

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Operator [43]

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(Operator Instructions) Your next question comes from Reg Spencer from Canaccord Genuity.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [44]

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Just a question around your contract negotiations you mentioned on your quarterly report that you'd be looking over the next little while to establish predominantly longer term or plus 1 year contracts. Just wondering, is that a suggestion that you could see prices further weakening going forward? Because I'm just wondering, is now the right time to be setting long-term contracts after pricing globally has pulled back quite some way? Or should we be thinking about that a different way, just the nature or something related to your plant products going forward? Or is it a view that different prices can actually weaken going forward?

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David Hall, Orocobre Limited - Business Development Manager [45]

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Reg, I think in relation to the long-term contracts, the way these arrangements are set up, how they're discussed, negotiated and eventually structured, given the nature of the agreement being long term, it's not set on a mechanism that's beholden to what the market price is today. There's a number of different pricing mechanisms that can be used, and we're currently in the throes of negotiating to -- and they range from having components of the contracts fixed, linked to market, whether that be an index or other mechanism using a basket of factors. So look, they're predominantly negotiated on a mechanism that is fair to both parties. So it will be ultimately reflective of the market conditions of the time by and large. We do have a couple of fixed price contracts in place, but they're at levels that we're comfortable with and the customers are comfortable with. And there are mechanisms within those contracts to make sure that neither party is disadvantaged.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [46]

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Something to comment on David's answer is that it is important for us to get these long-term relationships with the customers, and establishing the right price and mechanisms of the contract should benefit us in the long term. What we felt in the current downward movement of the market is that not having those contracts in place was somehow difficult for us to push the purified product into our customers because the long-term relationships and the qualifications weren't there.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [47]

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Okay. My other question is I suppose a follow-up to Glyn's earlier question about hydroxide. In the event that hydroxide prices were to fall below carbonate, and we did see that briefly last year or the year before, but if we have a look at plant capacity in the hydroxide market noting that a lot of that new capacity is integrated in hard rock, which is arguably at the bottom of the cost curve relative to conversation of carbonate, thinking about the supply and demand dynamics of the hydroxide market relative to carbonate, there is the potential for hydroxide to fall below carbonate pricing. So if that were to play out, how do you think about how the profitability of the Naraha JV? Could it be a case whereby they're paying market rates for the carbonate feedstock? So the Olaroz JV books a profit on that whereby there could be a situation that the Japanese JV is actually booking a loss. Are you able to -- I know you guys have previously said that the price set which you're going to be selling carbonate to the Japanese JV will be set at market rate, but what happens if hydroxide falls below carbonate? Just any comments on that.

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David Hall, Orocobre Limited - Business Development Manager [48]

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There's probably a whole other discussion that needs to be had on this, Reg. But look, in short, just to pick up on a couple of your comments, in regard to hard lithium hydroxide production from hard rock being low cost, in the case of integrated producers, I'd agree with you there. But outside of the high-quality, I should qualify that as a high-quality integrated producers, it's not as low cost as those high-quality integrated guys. So that's one point. The second point is that we're talking about comparing battery-grade lithium hydroxide with battery-grade lithium carbonate in terms of market price. As I mentioned before, there's always going to be a delta there in terms of the market price of the carbonate going into the Naraha plant. But look, in the event that we were to see a market dynamic where you have hydroxide less than carbonate, I think it's still highly likely that there's going to be a delta between the carbonate price going into Naraha versus the market price of battery-grade hydroxide in order to sustain the Naraha plant. I do acknowledge that you look at the Chinese market in the past, hydroxide prices have, in fact, been lower than carbonate at some point in time in the past. But when you look at the production of purified carbonate and also purified hydroxide, what's involved, the cost involved to get them there and also the market players involved, those low-cost, high-quality, fully integrated market players, I think there is also an element of responsible marketing here that comes into play as well. And I think the market will largely be led in the longer term by those larger companies that has the low-cost, high-quality integrated operations.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [49]

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Understood. I'd love to continue this offline, David. So...

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David Hall, Orocobre Limited - Business Development Manager [50]

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Yes. It's a long conversation, that one, Reg.

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Operator [51]

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Your next question comes from Nick Herbert from Crédit Suisse.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [52]

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Most of my questions have been answered. Martin, can I just clarify, the 16 harvest ponds that you've got, have they been providing any feed to the plant? Or did they provide any feed to the plant in the March quarter?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [53]

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No, they'd just been constructed and filled in. We use part of those new harvestable ponds to replace the ponds that we took out of production over to harvest them. That was temporary holding some brine, not providing any feedstock to the plant.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [54]

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Okay. No problem. And then just the guidance for the June quarter and the battery versus technical grades, but I know you said ideally you'd be producing battery grade by the end of this month, but do you mind just being a bit more explicit on your estimate for what that split will actually look like over the whole quarter?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [55]

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Yes. As I said before, we're basing these figures and ideas on the early numbers based on the confirmed shipment that we have to date. That number today looks pretty much due to prime products. David, you've got the numbers more in detail than I am. So you can comment on this better, please.

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David Hall, Orocobre Limited - Business Development Manager [56]

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Look, it's along the lines of 85% to 15%.

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Operator [57]

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Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [58]

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Well, again, thank you very much for participating in this call. As I've said before, we are comfortable with the evolution that we have during the quarter not only in terms of production but the progress with the Naraha plant and moving forward on the expansion on Stage 2, very important thing for Orocobre. We're continuing to work hard with the team to continue to improve in safety. We think that safety leads us in terms of quality and productivity, and that is the key focus that we have for our operation. So thank you very much. And the whole team of Orocobre remains available for any further question or doubt you may have. Thank you, Jessie, for hosting this call for us.