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Edited Transcript of ORE.AX earnings conference call or presentation 22-Feb-19 12:30am GMT

Half Year 2019 Orocobre Ltd Earnings Call

MILTON, QLD Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Orocobre Ltd earnings conference call or presentation Friday, February 22, 2019 at 12:30:00am 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

* Neil Kaplan

Orocobre Limited - CFO & Joint Company Secretary

* Tara Berrie

Orocobre Limited - Commercial Executive

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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

* Timothy Hoff

Deutsche Bank AG, Research Division - Research Analyst

* Warren Edney

Baillieu Holst Ltd, Research Division - Research 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 2019 Half Year Financial Results Market Update. (Operator Instructions) I would now like to hand the conference our to Mr. Martin Perez de Solay, Managing Director and CEO. Please go ahead.

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

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Thank you, Alexi, and thank you, everybody, for joining the 2019 Half Year Financial Results for Orocobre. I am Martin Perez de Solay. I want to take advantage of this opportunity that I have to first meet you after being named the Orocobre MD and CEO on last January '18.

I know that Orocobre enjoys a large and very supportive investor base, and I would like to take this opportunity to understand all your concerns and interest with regards to Orocobre. I am pleased to be appointed to take Orocobre -- to lead Orocobre to the next stage of development and becoming a larger and more solid company. I also want to thank the Board of the company and the team for giving me a very warm welcome and make me -- making me feel at home.

In order to continue, we should move on to the presentation now, and there is a very nice disclaimer, which I recommend that you read carefully at some point in time.

Again, this was another strong half year result, supported by a nice cash margin of $8,044 per tonne, which enabled us to reach a level of sales of $63.5 million at an average price of $12,295 per tonne, reaching an EBITDAIX for the period of $36.6 million.

All these figures, as you can see, are better than in the previous year, except for the EBITDAIX, which recognizes the impact of a $3 million tax export temporarily announced by the government on September 2018. During the same period, we have been able to commit $20 million to the expansion project that we will address shortly.

With regards to the current quarter, we -- as announced in the month of December, we continue to see the same trend in market prices with an average price that we expect around $9,000 per tonne for the first quarter of the year, and as we announced last Monday on the back of the strong rains in the area for the first few months -- of the months of -- for the first 2 weeks of February, we expect the production of the fiscal year of 2019 to be very similar to what it was in 2018.

With regards to the Orocobre Group, the net profit for the period was $24 million, including income tax recovery, which Neil will explain shortly. And it's also important to highlight $180 million debt package has been secured for the expansion project at Olaroz. We are now finalizing the recommendation and agreement with the banks in that regard.

The cash position of the company continues to be very strong with $284 million of cash in our balance sheet, which yields $207 million net cash position.

The other important highlight before passing it on to Neil is to remark that Borax has returned to the profit area, recording a $600,000 profit for the 6 months period, you will have seen these results. Neil, I'll now pass it on to you so that you can explain the financial numbers in more detail.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [3]

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Thank you, Martin, and good morning to all. First up is Olaroz joint venture structure. Toyota Tsusho Corporation last year bought 15% stake in Orocobre. Coupled with its 25% investment in Olaroz, TTC now has an effective 35% of the project. Orocobre has a 72.68% ownership in SDJ PTE, which in turn has a 91.5% interest in SDJ SA, giving Orocobre an effective 66.5% interest in SDJ SA. The statutory account shows such investment as being equity-accounted due to joint control being exercised with Toyota Tsusho. We have therefore presented the joint venture on a 100% basis, and then eliminate the noncontrolling interest to show what Orocobre's accounts would look like on a proportionally consolidated basis.

From January 1, 2019, onwards, we will no longer equity account SDJ PTE into our accounts or consolidate it.

Moving on to the next slide. This slide details the profit and loss on a proportionally consolidated basis. Moving from left to right, the first column is the statutory profit and loss as shown in the account. The second column shows the joint venture on 100% basis, whilst the third column eliminates the noncontrolling interest. Column 4 eliminates the equity-accounted amount resulting in column 5, which is what Orocobre's profit and loss seems like on a proportionally consolidated basis.

Looking at column 1, the EBITDAIX loss of $3.3 million, which takes into account corporate costs of $3.8 million, shows Borax has moved to an EBITDAIX profit of approximately $600,000, which is a $1.6 million improvement over the same period last year.

Taking into account interest earned by Orocobre Corporate Office, which is made up of interest on term deposits and shareholders' loans, the result was a profit before tax, impairment and ForEx of $3.6 million.

Looking at column 2, on a 100% basis, another strong half year for the joint venture with revenues of $63.5 million, earnings before interest tax, impairment and ForEx, and earnings before tax, impairment and ForEx of $32.2 million and $21.3 million, respectively.

ForEx losses of $6.9 million were mainly due to the severe peso devaluation on the peso VAT receivable as well as advanced payments to suppliers. An income tax benefit of USD 21.3 million was booked, which relates to the future temporary differences being unwound, hence reducing the deferred tax liability, given a further reduction of the Argentine income tax rate from 30% to 25% in 2020 and beyond, resulting in a tax benefit of USD 14.3 million.

Additionally, the reversal of the deferred tax liability, which had been recognized and charged in financial year 2018, for future -- sorry for withholding tax on future profit distributions of $13.1 million, was recorded as an income tax benefit.

These amounts were offset by income tax and foreign exchange differences for the period of USD 6.2 million. Following the ForEx charge and income tax benefit, the joint venture reported a total profit of $35.6 million. On a proportionally consolidated basis, Orocobre had revenues of $51.5 million, EBITDAIX of $21 million, and a profit before tax of $8.8 million.

Total profit after tax was $24 million, following its share of the tax benefit previously explained.

Moving on to the next slide. This waterfall chart breaks down the proportionally consolidated profit and loss from Orocobre's perspective, which is the final column in the previous slide.

EBITDAIX was a healthy $21 million. The foreign exchange loss is as explained on the previous slide. Orocobre is approximately 33.5% shareholding in Advantage Lithium and booked an $800,000 charge being its share of AAL's loss. The income tax benefit booked as Orocobre's share of such benefit from Olaroz is explained in the prior slide.

This brings it back to the statutory profit of $24 million.

Moving onto the next slide. This slide shows the proportionally consolidated balance sheet of Orocobre, which is detailed in the same format as the profit and loss. The balance sheet is stronger. Under current assets, cash is decreased on a consolidated basis to approximately USD 304 million, principally due to the funding of Olaroz expansion, corporate costs and the Cauchari joint venture funding. Inventory under current assets and noncurrent assets has increased largely due to an increase in finished product inventory at year-end as well as an increase in brine inventory. That is increased due to expansion CapEx, partially offset by the Argentine peso devaluation. Under noncurrent assets, the increase in exploration assets is mainly due to Orocobre's share of the spend at Cauchari, given its direct shareholding in the project.

The investment in the associates of $22.6 million is Orocobre's investment in Advantage Lithium. During the year, Orocobre participated in a private placement of CAD 5 million, which was partially offset by Orocobre's share of AAL's head office costs.

Current and noncurrent liabilities, loans and borrowings on a consolidated basis have remained at similar number compared to financial year 2018, due to an increase in funding for the expansion, partially offset by the project loan debt repayment. The deferred tax liability has reduced due to the effect of the earlier explanation.

Moving to the next slide. The proportionally consolidated cash flow shows strong cash flows from Olaroz. On a SDJ PTE basis in column 2 and on a proportionally consolidated basis in column 5, a build-up in inventory and other items of $14.4 million is detailed on the next slide, coupled with the payment of USD 2.9 million for the newly introduced export duty, increased cash outflows. The expansion of Olaroz and sustaining CapEx resulted in a CapEx charge of USD 20 million. The joint venture partners funded expansion to the extent of USD 28 million. The consolidated cash flow for the period was $304 million, leaving the company well positioned to fund its expansion plans.

The movements related to Olaroz are detailed in the following slide.

Moving to the next slide. Olaroz is repaying debt as the result of strong EBITDAIX of USD 36.5 million. Shareholders loans of $28 million were made to SDJ to finance the expansion. During the period, SDJ increased its working capital pre-export finance facility by $3.5 million. SDJ repaid Mizuho Bank principal of $11.5 million related to the project debt. CapEx of $20 million relates to $13.8 million of expansion capital and $6.2 million of sustaining CapEx. Finance costs are related to the Mizuho interest, interest rate swap and working capital facilities. A working capital movement of $14.4 million occurred. The main reasons for this are an increase of finished goods inventory of $4.2 million and $3.7 million of lithium carbonate equivalent in brine. The other working capital movements are a net increase of USD 6.5 million in accounts receivable and advance payments to suppliers, net of accounts payable. VAT payments exceeded VAT receipts by $7.5 million, mainly related to expansion CapEx VAT and a slower recovery of VAT.

Moving to the next slide. Strong cash flows have helped to reduce the Olaroz project debt facility down from USD 192 million to approximately USD 110 million, which translates to $82 million of principal paid over the first 3.5 years of the loan. The March payment, which is due in 2 weeks time, is taken into account in the numbers I've just mentioned. This facility has a low interest of approximately 4.25% and is repaid biannually through September 2024.

Orocobre has net debt of USD 207.7 million as of 31, December. So in summary, we have established ourselves as one of the world's highest margin producers. We have strong cash flows and are paying down debt. And we have a strong balance sheet with USD 284 million of corporate cash to fund our expansion plans.

Thank you, and I will pass you back to Martin.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [4]

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Thank you, Neil. And moving on to the operational review. As I said before, in order to take Orocobre to its next step of development, which is becoming a larger and more solid company, we need to set a vision. The vision is to be a world-class supplier of lithium chemicals. The way we understand the world-class supplier is by maintaining the existing cost leadership and improving it, having built-in quality within our systems and processes and continuous process and product innovation. As you know, Orocobre supplies into a very dynamic industry that changes its requirements every year, and we need to be up to the speed of the requirements and the changes from our customers.

In order to improve our performance, we need to better understand and serve our customers, and that is the key of our vision. Orocobre has all the key attributes to achieve this. It's the quality and the quantity of the brine resources at the Olaroz Salar support us in this strategy. As explained by Neil and said before, the strength of our cash margin makes us a world-class cost leader, and we have to continue to improve on this. We have very strong teams on site with very good technical people. There is expansion potential within the existing properties and within the Ol Salar. We have this right joint venture partners, the partnership with TTC, not only enables us a wider access to the world markets but also direct access into TMC, one of the largest demanders of lithium for electric vehicles in the next few years. And we also have secured access to capital with a key financial agreement for the expansion projects already in place.

Moving on to the next slide, please. It's based on what we said before, we have initiated a review at the operational areas with 3 focuses. Focuses are safety, quality and productivity. We believe that the -- this is a virtual signal that we produced successful results for Orocobre. We will continue to focus on the existing strategic initiatives. The improvement of production, not only in terms of quantity but also in terms of quality from the existing facilities at Stage 1. The expansion that we are undertaking at Stage 2 at the Olaroz Salar, the Naraha lithium hydroxide plant, which will add us the possibility to tackle the rapidly growing lithium hydroxide market. And a better basin understanding by drilling the basin more deeply, and having a thorough understanding of total resources in the area that will enable us to foresee the future.

The aim is to improve the management bandwidth and be able to focus and deliver better on the existing projects. And this should give us the opportunity to develop better organizational capabilities. We believe the results of all these measures should give us a better customer satisfaction and improved shareholder value.

Moving on to the growth projects. The number 1 project we have ahead is on Page 17, is a Stage 2 development of the Olaroz facility. As explained several times before, the objective is to focus the existing facilities of Stage 1 into the production of purified battery-grade lithium carbonate, while Stage 2 will primarily focus on production of primary product with an uptick of roughly 50% of the production to go into the Naraha lithium hydroxide plant that we are currently working on.

As said before, during this 6 months period, we committed $19 million of the total estimated $295 million for the expansion project. And we are now working on finalizing the detailed engineering and setting the purchase orders for the long-term delivery items for the expansion project.

As a consequence, we are reviewing budget and timing of the project, also to incorporate the ramp-up and commissioning periods that usually take longer than expected in this industry.

Moving on to the next slide. When we talk about the pond capacity, the most important thing here is that we are growing from a current pond area of 4 square kilometers into a total of more than 13 square kilometers. And as a consequence of having started to build the pond for the second stage well in advance, we have been able to start the harvesting of the pond from the first stage, maintaining the brine supply to the plant. As explained in the chart, further 6 ponds are currently under construction, and ponds are the most important part of the process because they provide the brine required in terms of quantity and quality by the process.

Moving on to the next slide. As I said before, half of the production from the growth in the capacity at Olaroz will be the feedstock for the Naraha lithium hydroxide plant. We're working on this jointly with TTC. The slide hasn't been changed very much from what you've seen before. But we are continuing to make progress, and we have evolved significantly in the project in the last month. And we expect to be able to make a final announcement of FID and start of works within the next month.

Moving on to the third important project and strategic is the understanding of the basin. The Advantage project has worked very well. Advantage has completed the drilling of a large quantity of wells that have given out very good information, not only on Advantage resources but on recovery resources. As you can see, Advantage has proved very good brine quality. And quantity of brine to be drained from the wells to the north of the property, which is the southern boundary of our property. And this has not also proven the ability -- the quality of the resources that we have in Olaroz, but also the continuation of the Salar towards the south and the ability of the Cauchari Salar to become a very interesting production opportunity in the area.

Moving on to Borax Argentina. As I've said before, it's a very good period for Borax, as it returned to positive operation or profit of $600,000, mostly fueled by the reduction of unit cost, and an increased number of sales, reaching $9.3 million in the year -- in the half year, I'm sorry. And the most important part is that we are refocusing Borax on the southern cone markets. Brazil, Argentina, Chile and Uruguay continue to be large demanders of boric acid for the agriculture industry. The Brazilian ceramics industry, which is the fourth largest in the world, is a very interesting customer for Borax that has been developed lately. And we are not looking into new applications of Borax products for shale drilling in the Argentinian Neuquén Basin.

I will now pass it on to Tara, who will explain us the market views and expected developments.

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Tara Berrie, Orocobre Limited - Commercial Executive [5]

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Thank you, Martin. While the lithium market continued to exhibit robust growth rate, averaging 20% year-on-year, China's economic conditions added to softer market conditions. Uncertainty along China's battery chain regarding the imminent EV policy amendment and increased supply from Chinese producers, moved the Chinese domestic price for both carbonate and hydroxide below seaborne prices. As a result, our price arbitrage flattened mid-2018, encouraging Chinese producers eager to shift inventory to the seaborne market.

Now moving on to the next slide. During the recent December quarter, China became a net exporter of lithium carbonate for the first time in over 8 years. Lithium hydroxide producers in China were also impacted for 2 reasons. Firstly, the expected size and speed of China's shift to new generation nickel-based cathodes, specifically NCM 811, favoring hydroxide, did not eventuate as expected. And secondly, the majority of new conversion capacity, added during 2018, was hydroxide based. As a result, exports grew 75% quarter-on-quarter, as hydroxide producers targeted seaborne markets, manufacturing battery materials with a higher dependence on hydroxide.

Now moving on to the next slide. Chinese exporters targeted Asian markets, notably South Korea and Japan, capitalizing on proximity of these markets relative to China, consistent robust demand growth and lower exposure to China's downstream electric vehicle market. Furthermore, lower than anticipated production from key Chilean suppliers during 2018 provided a favorably timed opportunity to Chinese exporters.

During 2018, Chinese producers grew market share of South Korea's carbonate and hydroxide imports by 21% and 15%, respectively.

Now moving on to the next slide. The structure of the battery market in terms of current capacity provides rationale as to why the market retrieved to South Korea and Japan, while the Chinese market remained soft, with this geographic region currently accounting for almost 1/4 of total global battery capacity.

Shifting attention to 2023 and 2028, you can see that North America and European capacity is expected to grow share while China largely retains its current proportion of the market, underpinned by easing of the Chinese government's policy on foreign investment and international car manufacturers' confidence in China's long-term prospects.

Now moving on to the final slide. Orocobre views the current conditions as a necessary correction following 3 to 4 years of high growth with market prices reaching levels 2 to 3x or more greater than the historic average.

The market is not short of recent examples, demonstrating the challenges involved in adding lithium supply. Furthermore, over 1,500 gigawatts of announced battery manufacturing capacity is expected by 2028, supporting robust demand growth. Accordingly, Orocobre maintains long-term demand forecast in line with the consensus of other established lithium salt producers in the range of 17% to 20% CAGR between 2018 and 2025. And that concludes the market section. I will now pass the presentation over to Martin. Thank you.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [6]

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Thank you, Tara, and thank you for your market knowledge and keeping us well up to speed with the market trends, as usual. On the summary of this result, the most important things are the profit for the period of $24 million with Olaroz facility continuing to earn positive EBITDAIX of $36.6 million, boosted by the existing $8,000 margin per tonne that we recorded in the period. The growth projects are well underway and funded. The expansion of Olaroz on the 10,000-tonne lithium hydroxide plant in Naraha as explained before. With regards to the existing quarter -- to the current quarter, I'm sorry, we -- after the rain, we expect a similar performance to previous year in terms of total production. And as explained in December, we continue to see prices in the range of $9,000 per tonne FOB, give or take a few hundred dollars on some agreements that we yet have to finalize.

The other important thing is to highlight the return of Borax to operational profit. And now, I want to thank the whole team of Orocobre for putting together this presentation and explanations. And I will pass it on to Alexi again for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first fine question comes from Reg Spence from Canaccord Genuity.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [2]

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My question relates more around operations. Obviously, you've been impacted by wet weather in the (inaudible). I was wondering if you could provide some comments around the status on the decision to install evaporators or other mitigating strategies to deal with potential weather impacts going forward?

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

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Thank you for your question, Reg. The evaporator/crystallizer thing has been on for quite some time. We are looking into this alternative. Yes, we've been impacted by rain, and it's expected to be impacted by rain during this period of the year, every year. We have taken some measures and we're improving preparation for the next rainy season. In the meantime, what we are doing is trying to keep the brine quality as high as possible. We all endeavor to analyze and study evaporator/crystallizer suctions, and we will give a thorough analysis to that. Have not yet seen anything compelling in that regard. I like to mention that they are significantly complex and expensive from an operational cost point of view, as they demand lots of energy and purification of the brine, but they also provide the solution of being able to keep the brine during the wet season.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [4]

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Okay. I guess, leading on from that point, then can you provide a comment on how long you expect it would take to get your brine concentration or your pond concentration levels up to more steady state level, noting that evaporation rates do start to tail off as we move into the winter.

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

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Well, yes, we expect to keep lower concentration in the brine until the end of the month of March, since there may be some more rains hitting us. And that's the reason for having announced our expected production for the year similar to what it was in the previous year, taking into consideration that possibility. As a consequence, we are running no purified product in this month and that also impacts the price forecast. We are mostly moving towards primary product. Since the recovery rates come down as a consequence of lower concentration and the costs go up, the best operation is to produce brine during -- excuse me, to produce primary lithium carbonate during this month.

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Reg Spencer, Canaccord Genuity Limited, Research Division - Mining Analyst [6]

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Okay. Just one final question on that pricing. So your pricing guidance for the quarter, $9,000 a tonne, that's obviously a lot lower than 1Q. Previously, you guys commented that, that pricing environment was a function of both the product mix and market conditions. So that Q-on-Q drop towards $9,000 is now looks like, it's a bit more biased towards product mix. Is that accurate way to think about it?

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

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There continues to be the mix of both. As I've said before, we still see the market as slightly soft, as I said in the December release. So it's a mix of both. I can't tell you, it's just one of them.

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Operator [8]

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Your next question comes from Joel Jackson from BMO Capital Markets.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [9]

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This is Bria Murphy on for Joel Jackson. Just wondering what your outlook is for your lithium cost per tonne, given your lower production volume forecast in 2019?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [10]

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It's Neil. We generally don't put out cost per tonne looking forward. We've never guided on that, and we'll continue not to do so.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [11]

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Okay. And then just on the hydroxide plants. I noticed that the EPC contract is still outstanding. Is this something that could impact, I guess, the commissioning schedule for the plants? And when do you expect to, I guess, finalize negotiations there?

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

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Well, we've made a lot of progress in the last few weeks with the TTC and the preferred contractor on the plant. We expect to announce something within the next months and keep the original schedule for the Naraha plant.

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Operator [13]

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Your next question comes from Tim Hoff from Deutsche Bank.

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Timothy Hoff, Deutsche Bank AG, Research Division - Research Analyst [14]

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I was wondering if you could talk through the evolution of your customer mix? Have you been engaging with new customers? And is there any initial discounting to get your products through the door, to start off with?

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

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Let me please pass that question on to David that's been following the market longer than I have.

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David Hall, Orocobre Limited - Business Development Manager [16]

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Tim, what we have in trying already and was happening last year and is currently happening and is planned to continue to occur throughout this year and I would expect beyond that is we had quite a number of product trials with customers, particularly in the battery space for micronized product. And so that'll continue throughout this year. What that means in terms of pricing is that when you're looking at these large corporate accounts in that battery space, they have existing contractual arrangements for supply at very competitive prices. So obviously, we need to meet the market on that and, of course, also acknowledging that there is a cost to customers to run these product trials, and they typically run over a period of 3 to 6 months. With the bigger guys, they tend to be 6 months, and obviously, the volumes are higher.

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Timothy Hoff, Deutsche Bank AG, Research Division - Research Analyst [17]

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So all else being equal, that should reduce a little bit future of those customers if you can snag those accounts?

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David Hall, Orocobre Limited - Business Development Manager [18]

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Well, it will mean that we'll be able to evolve to a higher proportion of longer-term agreements because ultimately, that's what's driving the activity for approval in the first place from both sides, from our side and from the customer side.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [19]

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Tim, if I can add to what David said, from an operational point of view, improving quality and reliability becomes key to secure this long-term contracts. And we're working seriously in that direction, which is where we feel long-term value to shareholders is being derived from, is from establishing these longer-term relationships, and that will enable us to achieve better prices.

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Timothy Hoff, Deutsche Bank AG, Research Division - Research Analyst [20]

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And, I guess, Martin, probably jump straight onto that. The pond system has come under a lot of scrutiny in the past. I guess, how do you view the Stage 1 ponds? And are you satisfied with the current system? Early take on it?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [21]

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It has been a lot of learning on the Stage 1 pond system, and a lot of it has been incorporated into the design of the second-stage pond systems. As I said before, the way I see quality is built-in quality since the very first stage of the process, which is the design of the process. Also, we are adjusting some minor issues in the design of the second-stage lithium carbonate plant to address the evolution in the customer quality needs that we are seeing. This industry is becoming more and more sophisticated, and the customers are requiring lower amounts of contaminants all the time. And we are improving our products and improving designs to be able to do that. Addressing your first part of the question, whether the ponds from Stage 1 are enough or not, it all depends on the climate and the type of production we are doing for a prime production pond from Stage 1 are well enough. As we move into purified products and recovery rates are lower, we put those ponds under more stress, so the ability to have more pond area available should help us to improve results in the future.

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Timothy Hoff, Deutsche Bank AG, Research Division - Research Analyst [22]

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And very quickly, Neil, if I could just ask one quick question, which is -- you just switch over to consolidated accounting. Would it be fair to use the current consolidated balance sheet in the presentation as a rough base for what we can reference from?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [23]

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Correct. Yes, exactly. The final column, Tim, would be your -- what the consolidation will pretty much look like.

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Operator [24]

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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 [25]

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First one is around the plant itself. Just wanted to understand, post the installation of the CO2 recapture facility, at this point in time, does the plant have the capability if the brine's available to be able to sort of produce 100% purified product? And that, too, as the reduced cost, i.e., there is no external requirement of CO2 anymore or there is still? And how does that cost curve change with that? That's the first one.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [26]

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Many parts to your question. I'll try to answer them all. The CO2 recovery system enables us to recover part of the CO2 that we produce, that it requires a lower amount of CO2 to produce purified product. Nonetheless, we continue to acquire external supply of CO2, but what we are seeing is the cost of the CO2 reagent coming down as a consequence of that. We're currently recovering roughly 55% of the CO2 volume that is being used. That is enabling us to do larger runs of purified product without having to add additional CO2 to the system. Second question is, yes, we can run the existing plant at a 100% purified product. There is no limitation to that in terms of -- the plant can run fully in primary or fully in purified. That's not a limit. I forgot the third part of your question, I'm sorry.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [27]

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No, that's fine. I think I've probably forgotten it myself. But in terms of the CO2 specifically, I mean, if we go back in time to the feasibility, the idea was to be able to recapture 100%. Is there any way that, that's possible? Or I mean, is there any way that you can bring the cost down going forward in terms of the CO2 specifically, perhaps atmospheric recapture or something else, I mean, because you are trying to sort of utilize this plant at 100% in CO2 terms at least?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [28]

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I think that -- there is a challenge. We operate at 60% normal atmospheric pressure up there so it puts some challenge on that. Nonetheless, I have been here for only 3 months and 1 month as CEO. But I understand that the objective was never to capture 100% of the CO2 that is being used in the process because science would never allow that. So we are within the expected range.

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

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Understand, okay. And then in terms of the pond system then, I just want to understand, is there impediment perhaps, and this is a very basic question, in basically taking some of the harvest -- pond inventory, which is at concentration and stored sort of under cover or elsewhere in a tank? I mean, I know some of the brine producers around the world do tend to truck volumes of brine to industrial facilities and then process them there. I mean, is that something that potentially can be implemented here?

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

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Yes, let me tell you what we've done, and we have seen some result of that. And indeed, the quality of the brine is better than what it was in previous years with the same amount of rain. What we've done is to increase the depth of the ponds that have the brine ready to enter the plant. That is kind of having a tank. But the volumes are huge. You wouldn't be able to keep all that brine in a tank. And given the concentration of magnesium that the brine that we have in the process, it is highly difficult to increase the concentration of the brine beyond the current levels we are increasing at the ponds without losing any lithium precipitation formed in those ponds. So what we are looking into is something like maybe deeper ponds in the future that should help us have a larger amount of brine stowed with a lower surface that's less exposed to dilution from rain.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [31]

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Understood, okay. And then just final one is -- it's just a follow-on from Reg's question. In terms of the product for the March quarter, is it fair to assume that it's 100% primary that's going out the door at that $9,000 price?

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

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Well, it's going out of the door of the plant, but we are selling some purified that we had in stock. So that's why I think I couldn't tell you if it's just primary what we are selling in the quarter.

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Operator [33]

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Your next question comes from Andrew Hodge from Macquarie Group.

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Andrew Hodge, Macquarie Research - Research Analyst [34]

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I have 3 questions. The first one is just on the CapEx. I had actually missed in the quarterly that you guys have increased the cost of the expansion to $295 million, and I just wanted to understand -- and I realize that it's small, but I wanted to understand what increased the cost compared to where you guys were before and whether or not you're happy with that cost level now.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [35]

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Well, I think that $295 million number has -- have been out there for quite some time by now. And what we are doing is reviewing that cost as we are finalizing the detail, engineering and making us, as said before, some adjustments to the plant and the ponds that we incorporated the learning from the first stage. Don't expect a significant move here, but the whole budget is being reviewed, and I would like to take decent time to put forward a revised number and time line on the expansion. However, the expansion is moving ahead. The works have been done, ponds have been built. And we are not delaying it, just reviewing the total cost so as to put a number that we can deliver on.

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Andrew Hodge, Macquarie Research - Research Analyst [36]

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The $295 million is new from January. You were $285 million before that, but minor point. But just in terms of the debt funding for the expansion then, can you give an idea about how that's progressing at the moment?

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

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I'm sorry. I will have to answer that question again. I was still -- Neil was pointing out here that the $295 million number was announced in the FID release that went out on November 28. I'm sorry. Could you repeat the question? Sorry.

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Andrew Hodge, Macquarie Research - Research Analyst [38]

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Sure. The debt funding for the rest of the expansion.

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

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The debt funding is -- Neil can answer that better than I.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [40]

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Sorry, so what's the question, Andrew?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [41]

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What is the debt funding...

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Andrew Hodge, Macquarie Research - Research Analyst [42]

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Just how is the debt funding progressing at the moment in terms of the expansion?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [43]

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No worries. That's all progressing, Andrew. It's $180 million, which has been agreed. We're just busy now finalizing documentation over the coming weeks, and we lock it down. So I mean, it's all been agreed. It's just a matter of updating all the financial documentation.

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Andrew Hodge, Macquarie Research - Research Analyst [44]

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Okay. And then last question is really just, in terms of the production losses that you guys have had from the rainfall on (inaudible) obviously, kind of downgraded as well. Just wanted to get a sense of, I guess, the order of magnitude. I think [basin] had lost about 2 weeks' worth of production. And so I wanted to get if that's kind of a similar number to you guys.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [45]

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Well, it's not -- we haven't lost any days of production as a consequence of the rain. What's going on is that since the brine quality has been reducing where I have -- we have decided to limit the amount of brine going through the plant to avoid further increasing costs and then forcing the plant to run at a level that doesn't make sense to keep a production number, which will then deteriorate the brine quality to a worse stage in the next quarters. So here is a new KPI that we are putting on, which is working towards a stable brine quality at the entrance of the plant. A stable brine quality should stabilize the plant. Once we stabilize the plant, we should be able to understand and improve the recovery grades. And it is this whole idea that I pointed out in the presentation of safety, quality and productivity. Stabilizing a chemical plant becomes key in terms of improving this productivity. And that's what we are aiming to do.

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Andrew Hodge, Macquarie Research - Research Analyst [46]

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Okay. And do you think that, after this, you guys will be able to provide more definitive guidance then in terms of production?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [47]

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Well, we have to review the guidance policy with our board, and [else] we are not going to change it for the time being. But within some period of time, I will be able to better tell the market what I see from the existing facilities improvements that we need and the expected long-term productions from the plant. I'm taking this time to review and change the focus towards these productivity, quality and safety standards that we are trying to implement here.

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Operator [48]

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Your next question comes from Warren Edney from Baillieu.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [49]

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I've just got a couple of financial sort of questions. The export charge in the accounts, where does that fit? Is it in the tax line for SDJ?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [50]

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No, it's not in the tax line, Warren. It's before -- it's taken off in arriving at the EBITDAIX. So it's taken off earlier. It's an export duty, really. It's (inaudible)

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [51]

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And next one was just on the interest charge. Did that -- is that through accruals or something like that? It seems to be a lot higher based on your debt balance and also the interest rate you disclosed.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [52]

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Sorry, the interest accrual? If you can just point me to where you are looking.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [53]

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The $10.8 million in the accounts.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [54]

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Ah, the finance cost. These are -- yes. Yes, it's relating to discounting that we have to perform due to the audits. Obviously, you've got in there as well all the Mizuho cost.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [55]

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And there's additional charges, these are not just interest charges?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [56]

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Yes, it's the -- it's the IRS receivables that have been discounted in that as well. There's a big charge in it. We book it to finance cost, Warren, due to the devaluation. So we've had to discount those IRS receivables, and that just pushes up that number. The Mizuho interest, which would be in there, would always be in there. The -- also, the interest on the working capital facilities.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [57]

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All right. And final one. Just on the Borax D&A, I know it's not much, but there wasn't any -- is that a sort of permanent thing? Or is that something netting off in terms of the accounting for Borax?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [58]

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Sorry, which number are you referring to?

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David Hall, Orocobre Limited - Business Development Manager [59]

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D&A.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [60]

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In the accounts, there's no D&A for Borax.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [61]

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Yes, D&A. Yes, because we wrote or we impaired all the asset. We impaired the fixed assets at the last period so there was no charge.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [62]

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Oh, okay. Because I thought that there were still some assets in the account, segment...

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [63]

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Yes, it's a work in progress. That's a work in process, work in progress on that asset.

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Warren Edney, Baillieu Holst Ltd, Research Division - Research Analyst [64]

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Oh, all right. It's not fixed, not plant equipment or anything like that?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [65]

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Yes, hasn't come into the fixed asset charge yet. So given we write off everything in the prop, there was nothing to depreciate. And what you're seeing in the accounts is work in progress, really.

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Operator [66]

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(Operator Instructions) Your next fine question comes from Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [67]

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You talked a little bit about you’ve sold some finished goods inventory in the quarter. Just wondering, was that priced last quarter? Or is it -- and so it's pulling through legacy price? Or is it having to be priced at the current market? Just give me a sense of how much SKU there is on the $9,000 you're realizing in the March quarter. And then just sort of more interested in some extra thoughts around the market, how would you characterize it at the moment, further downside risk or stabilizing. And then just I think, on the review, just your early thoughts, obviously, it sounds like you're having CapEx -- all these reviews usually end up costing us more. But is there any offset at all on the volume side as part of this review as well? Do you get us a sense that this review may end up raising capital, but we could also see some other benefits as well?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [68]

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Let me start with the last part of your question, and Nick (sic) [Neil] will answer you on the stock issue. Starting from the back, I'm reviewing the CapEx amount in order to make sure that the next number we disclose is a number that we deliver. The -- what I'm saying is we are changing certain equipment, and as we play the long-term purchase orders for part of the equipment, we might see changes in the CapEx. Yes, it is usual to see an increase in the CapEx. However, I don't expect to see an increase in the CapEx nor I want to announce any reduction. I'm just reviewing it, and I will ask you to bear with us for some time until we can publish the new number. We're still using the $295 million as our benchmark number for the expansion. And I don't expect surprises here. Having said that, we'll do the same with the timetable. However, you mentioned whether we should expect any improvement as a consequence of that. I will tell the improvement will come in the process and the quality of products. We are making a more solid and robust process that should be able to deliver better quality and more stable production as we progress. The second part of your question was regarding the market. Maybe David can help me on that. But yes, we'd all like the market to bounce from here, but we continue to see just a similar situation. I think more of -- I don't know what you would say, David, but a flat market -- or what...

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David Hall, Orocobre Limited - Business Development Manager [69]

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How I characterize the market, it's, Glyn, it's a bit of a wait-and-see scenario. I don't want that to sound like a cop-out. But it is at this stage, to put a bit more color on that is, as you know, there's been a fair bit of additional production that's entered the market with, particularly, the brine producers in China. As Tara presented, there's been quite a volume of that product that has found its way into seaborne markets. So it's the first time that we've seen product exported out of China in quite some time. So that volume needs to wash through. But look, in terms of when we'll see some stability and attract back to normal market conditions, depending on how we classify normal will define normal. Then certainly, entering into the second half, we would expect things to have largely sorted themselves out. We don't want to be calling the current position as the bottom, but it certainly has many signs of being exactly that.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [70]

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The last part is the answer on the stocks, Neil.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [71]

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Glyn, just the last question, you're referring to the stock -- if you can just repeat that exactly what it was.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [72]

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Yes, sure. Just when you -- you've obviously commented earlier on the call that you were selling some inventory as well this quarter. And I was just wondering, was that priced last year? Or is it going out of prevailing market price? Just to give me a sense of -- if it was priced last year, that's obviously pulling up the SKU of the $9,000. So I was just trying to understand where -- what that was priced?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [73]

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Well, okay, in terms of when the contracts were agreed?

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [74]

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Yes. So like, obviously, if it was priced last year, it would've been a better price than if you were pricing it today. And so that would mean -- that would then mean you are selling on spot today is -- I'm just trying to figure out what the weighted SKU of the $9,000 is how much more like where is the market today, I guess.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [75]

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Yes, look, in some deals that were agreed going back to, say, end of October, November of last quarter. But if you're looking for anything to sort of prior to that, the proportion would be very low to 0. Because typically, entering into a new calendar year, we have resetting agreements. In saying that, we actually do have a couple of longer-term agreements in place that are multiyear. But again, they weren't agreed until October, November last year either.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [76]

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But if you excluded the legacy sale, then the weighted average for Q1 of $9,000 would probably be a little bit lower is a bottom line.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [77]

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Yes, I'm not quite sure that, that would be the case, actually.

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Operator [78]

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Your next question is a follow-up question from Nick Herbert from Crédit Suisse.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [79]

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Just a few small ones from me, please. And just taking it back to production, I appreciate it might be difficult to be definitive on this, but just interested in how you think the recent heavy rainfall may impact next year's production for FY '20 given the cycle times through the pond network and, I guess, in that context, just to what extent that might be offset by the pond network expansion that you've spoken to. That's question 1.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [80]

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Very difficult, as you said, to give you precise numbers on this. So as you can imagine, we -- the fact that we are now focusing on trying to keep a good brine quality at the pond and not where we are extracting them to increase production at low recovery rates will help us to have a better, more stable brine quality during the period. We should enter the dry season with better brine quality and be able to improve production as well as improving purified production from thereon. Also, the fact that we are building ponds in advance of the second stage has enabled us to speed up the harvesting, and we will see more harvesting of ponds from the first stage as a dry season starts. And thus, the Stage 1 production will benefit as a consequence of the ponds being built ahead of Stage 2 production. Looking into the longer term, managing 13 square kilometers area of ponds will make both Stage 1 and Stage 2 more reliable and foreseeable in the future. It's very difficult to give you more detailed information, and I don't know if what I said answered your question.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [81]

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Yes. No, that helps. And then just a clarification point. When you're talking about the evaporators, And I know it's still subject to your studies, but is there any chance that those could be installed and brought forward ahead of formal Stage 2 commissioning? Or if and when they come in, they won't be sort of second-half calendar '20 at the earliest.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [82]

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Well, we'll have a -- I will have to ask you to wait on that a little bit until I can get a more thorough study about the different technologies available for this purpose and come to a conclusion. I don't have sufficient information to tell you by when could they be installed. I'm sorry.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [83]

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That's okay. All right, no worries. And then final one just for you, Neil. Just back to the tax, just second-half SDJ tax, is there anything else that may trip us up there? Or should we just assume those normalized tax rates that you mentioned?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [84]

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Yes, I mean, moving forward, we've -- I mean, you heard what I said and what's in the documents, so there's 2 big tax events. But they've been dealt with now. And pushing forward, yes, will just be business as usual in terms of taxes.

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Operator [85]

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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 [86]

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Just wondering, with Stage 2 capacity, you guys will be seeing in carbonite production to total 42,500 tonnes per annum. Just wondering how confident you are in achieving this? And what do you see is the key issues in achieving this nameplate production in consideration to what you've learned in Stage 1?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [87]

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Well, the target continues to be the 42,500. We are reviewing the ability of Stage 1 and Stage 2 delivery in that regard. The fact that we are making Stage 2 more and more reliable and stronger obviously helps us in that regard. With regards to production from Stage 1, as you can imagine, this is a plant that started 2 years ago with a very large ramp-up period and encountered quite a lot of issues that were very well sorted out by the team to be able to bring plant into production. There are lots of issues and bottlenecks that affect the overall capacity of the plaint to deliver nameplate, starting from brine quality and about sizes of reactors and capacity of pumps and [micronizer funnels]. But the most important factor is working on the recovery factor of the plant that is -- it's a multiplier on the ability to produce. Having been able to complete further studies there and we're working in the direction of maximizing production at the most cost-convenient curve for the company, and that's the whole aim of what I name productivity, is to improve the production and reduce the cost of operations.

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Operator [88]

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We do have one question on the webcast: "When will the purified circuit resume production?"

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [89]

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As soon as brine quality starts to show improvement from getting away from the rainy season. We have seen a nice behavior of the brine in the last few days. It depends a lot on the amount of rain that we have during the month of March. If it rains as in the previous years, we may not see purified until the end of month of March, maybe beginning of April. If the weather starts to dry up earlier, we will see purified production coming early on stage.

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Operator [90]

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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 [91]

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Thank you. Thank you very much for all our investors and research brokers in this -- participating in this conversation.

As I said at the beginning, Orocobre enjoys strong support from its investor base, and I hope to continue in that direction. Our shareholders are the most important customer we have to please, and it is our objective to continue to work towards increasing shareholder value. It is very interesting for me and will be over time to meet you on a one-on-one basis and understand what are your interests and concerns and be able to deliver better explanations and fulfill your interest.

The whole company is available for any question or requests you may have. And thank you all very much for this opportunity.