Orocobre Limited(OTCPK:OROCF) Full Year 2020 Earnings Conference Call August 27, 2020 8:30 PM ET

Company Participants

Martín Pérez de Solay – Managing Director and Chief Executive Officer

Neil Kaplan – Chief Financial Officer

Tara Berrie – Commercial Executive

Conference Call Participants

Nick Herbert – Crédit Suisse

Reg Spencer – Canaccord

Glyn Lawcock – UBS

Rahul Anand – Morgan Stanley

Bria Murphy – BMO Capital Markets

Levi Spry – JPM

Martín Pérez de Solay

I would like to welcome you all to Orocobre’s 2020 full-year financial results presentation. Let me begin with the summary of today’s announcement and discussion of COVID-19 before Mr. Neil Kaplan takes us through the full-year financials in greater detail. As you all are aware the lithium market has been challenging for producers over the past 18 months. And with the such market conditions persistent to the September quarter, we’re seeing signs of increasing volumes on some indications – are improving.

During the year we demonstrated strong production and cost management capabilities, when faced with difficult market conditions, which were further destabilized by COVID-19. The company acknowledges the need to continue Stage 2 expansion plan despite the short-term challenges. Therefore we’re undertaking AUD 120 million equity raising share purchase plan to deliver a balance sheet flexibility required to operate and expand during this volatile market conditions. The equity raise will also ensure the Stage 1 operation and Stage 2 are fully funded taking into account capital contingent fees from a range of extended COVID-19 restricted scenarios and allow us to take advantage of opportunities as they arise.

We understand the importance of providing confidence and supply security to our existing customers as well as those who we are progressing negotiations with. In this regard, we announced the completion of a non-binding MOU for long-term supply to Toyota and Panasonic joint venture Prime Planet Energy & Solutions.

In response to COVID, COVID has meant that we have been adapting, how we do business while supporting our communities and people. From the start, we established an emergency committee to coordinate our response interactions. We have also worked closely with local authorities while maintaining open action plan communication with our employees, suppliers, and communities, despite it is not being possible to meet face-to-face and with limited communications in some areas. Regular meetings of the management team had worked to implement a comprehensive biosecurity protocol, change rosters, reduced staffing and adapt operating practices to minimize the risk of COVID infection. So far, we have been relatively successful, but under no illusion that COVID-19 will continue to affect how we operate in our markets for some time to come.

Over the last year, weak product pricing has been the key driver of our financial results, which has seen the Orocobre Group post a consolidated net loss after tax of 67.1 million in impairment of inventory and other assets. The underlying loss was significantly less at 22 million. Despite this, the cash position of the company remains at 171.8 million with a net cash position for 44.6 million at 30 June, 2020 and before completing the equity raising.

Safety, productivity and quality remain our key focus area and I believe safety is a foundation to improve performance. At Olaroz, the lost time incident frequency rate has improved from 3.3 in financial year 2019 to 1.9. During in this period, weak lithium prices we have been working on controlling the controllable and we have achieved a 22% reduction in costs between Q1 and Q4 financial year 2020. This has been done by reducing the number of contractors and eliminating all non-essential spend. During the year we produced 11,922 tonnes of lithium carbonate. This was only 5% down from the previous year and a testament to the improvement of operations considering Olaroz was completely shut for 36 days, including the three week maintenance and operating under reduced for further 113 days to meet a subdued demand.

Olaroz revenue for the year was 58 million from sales of 10,514 tonnes, which was achieved with average price received of $5,520 per ton. This resulted in gross cash margin of $1,148 per ton for the year of 21%. I will now pass-on to our Corporate CFO Mr. Neil Kaplan to run through the financial result in detail.

Neil Kaplan

Thanks Martin and good morning to all. First up is the consolidated profit and loss. Lower revenues of $77.1 million have been mainly affected by lower pricing with average price of $5,520 per ton being received versus $10,322 per ton for the prior corresponding period, a 46% drop. Tonnes sold also reduced from 12,080 tons to 10,014 tons a 13% reduction, mainly related to the effects of coronavirus. Olaroz cash cost of goods sold of $4,372 a ton is higher than the same period in FY 2019 of $4,302 a ton, excluding royalties export duties and head office costs, mainly due to lower production volumes, the reduction in the export incentive due to lower sales and a warranty provision related to packaging costs.

Over the year from September quarter 2019 to June quarter 2020, there has been a 22% reduction in cash cost of goods per ton. Corporate office costs reduced by approximately 24% excluding restructuring cost.

A bridge of Olaroz’s EBITDAX from FY 2019 to FY 2020 can be seen in an upcoming slide. In spite of soft market conditions, gross cash margin remained positive $1,148 a ton or 21% cash margin. EBITDAX for the year was a loss of $3.9 million, which includes approximately $3.6 million related to export duties, restructuring costs of $1 million and $2 million incurred well production activities were halted due to coronavirus.

Net finance charges of $12.9 million was the result of interest income of $5.6 million being offset by net finance costs of $18.5 million related to the project finance facility, working capital facilities, increase on non-controlling shareholders loans and an non-cash interest expense on lease liabilities and changes in fair value. The non-cash impairment charge of $33.1 million related to finished goods and brine inventories being written down by $18.1 million, AAL carrying value as an associate being written down by $10.3 million prior to consolidation and other assets of $4.7 million. The income tax benefits is mainly due to the loss for the period, which resulted in an increase to the carried forward tax losses. This resulted in aseptically loss on a 100% basis after tax of $67.1 million.

Moving to the next slide, this slide details the underlying profits. The group’s statutory loss after the tax of $67.1 million on a 100% basis to an underlying loss after tax of $22 million, we have made the necessary adjustments as detailed on the slide. The main adjustments being the impairment charge of $33.1 million and Forex losses of $11.7 million. The underlying loss of $22 million for FY 2020 is mainly due to lower average lithium prices received, higher depreciation and higher finance costs on Olaroz as well as reduced interest income at corporate level.

Moving to the next slide, this slide details the bridge between all the Olaroz’s EBITDAX for FY 2019 of $54.1 million and the FY 2020 negative EBITDAX of $3.9 million. The main components of the reduction are related to lithium pricing of $58.3 million, reduced volume sold of $9.2 million and Olaroz restructure costs of $3 million offset by reduction in OpEx due to reduction in volume of $7.8 million and cost reductions of $3.2 million.

Moving to the next slide. This slide details what the consolidated balance sheet looks like for FY 2020 versus FY 2019. The key points on the balance sheet are: cash has mainly reduced, given the funding of Stage 2 expansion, reduction in working capital facility, and net operating outflows of the SDJ. PPE has increased mainly as a result of the Stage 3 expansion.

The exploration and evaluation costs have increased due to the consolidation of AAL, which has also resulted in a decrease in investment in associates. Current external borrowings reduced as a result of the repayment of a portion of the SDJ working capital facilities due to a change in Argentine regulation, whilst the noncurrent external borrowings increased due to shareholders’ loans from TTC, largely offset by a payment to Mizuho for the Stage 1 project finance loan.

The outstanding principal on the Stage 1 project finance loan has reduced from $191.9 million to approximately $88 million at 30 June. And in less than two weeks time, will have reduced to approximately $76 million.

A reduction of the deferred tax liability is mainly due to the loss for the period, which resulted in an increase to the carried forward tax losses. The finance lease liability of $28.7 million is the effect of adopting AASB 16 related to leases.

Moving to the next slide. Cash generated from operations resulted in a negative $6.9 million due to the substantial dropping revenues, mainly related to sales pricing and volume. In detailing some of the main movements, purchase of property, plant and equipment relates mainly to expansion as well as sustaining CapEx. Proceeds from borrowings related expansion drawdown on the Mizuho loan, TTC shareholders’ loans to SDJ and a drawdown of Argentine peso working capital facilities.

Repayment of borrowings is the reduction of the principal for the Stage 1 project finance loan and repayment of U.S. dollar working capital facilities.

Moving to the next slide. If we look at the cash cost of goods sold as reported in our quarterlies, we have reduced from over $5,000 a tonne in September quarter to $3,920 a tonne in the June quarter, a 22% reduction. This is the result of focusing on controlling the controllables, which we will continue to do.

In summary, despite a soft lithium market and coronavirus, Olaroz continue to be operationally profitable with a positive cash margin and positive EBITDAIX of US$5.7 million. And we continue to pay down project finance debt for Stage 1 with circa $115 million we paid by September 2020.

Moving to the current quarter. This quarter will be impacted by three weeks scheduled maintenance shutdown and costs for the quarter expected to be between $3,900 and $4,100 a tonne. Approximately 3,800 tonnes are expected to be sold in September quarter with realized pricing of between $3,000 and $3,200 a tonne. A little less than 50% of these tonnes were sold in July into the spot market resulting in lower pricing with intention of reducing inventories and ensuring cash flow. Thank you.

And I will now pass you back to Martin.

Martín Pérez de Solay

Thank you, Neil. Operating within the COVID-19 environment has its challenges. With Stage 1, currently operating with a reduced workforce on Stage 2 expansion activities slowing down given staff restrictions. We have sized our equity raising to ensure that we have sufficient contingencies and unrestricted cash to fund our corporate costs, Stage 1 ramp-up and Stage 2 CapEx in an extended downtown scenario.

Additional funds have raised beyond this requirement could be used to expand the production capacity of the hydroxide plant or further develop all our resources, among other opportunities. With improving visibility delivered by a buildup of our long-term customer order book and decisions regarding our product mix and expansion plans will be made with regards to needs of our customers.

The management and improvement of the Olaroz Stage 1 performance remains focused on safety, quality and productivity. Despite operating with reduced staff as a consequence of current COVID-19 restrictions, plant stability and reliability has improved resulting in a decrease of unplanned maintenance events and repair turnaround time. Plant yield and lithium recovery have also been improved.

During the year, we implemented half of safety systems and completed new medical facilities. We also saw quality improvement with all product deliveries made within required customer specification.

Kaizen activities have been implemented in coordination with our Toyota team by applying the Toyota Production System. Kaizen is a highly successful continuous improvement process utilized in the Japanese manufacturing industry. While it is early in the implementation process, results have been positive with a noticeable change in the mindset of our operational personnel.

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The Olaroz Stage 2 expansion will increase total expected lithium carbonate production capacity by 25,000 tonnes to approximately 42,500 tonnes per annum of which 10,000 tonnes will be used as feedstock for the Naraha Lithium Hydroxide Plant.

As we outlined in the June quarter, the capital expenditure estimate is now $330 million. Key areas of cost escalation included COVID-19 related delays, more robust technology-related to the carbonation process, management of impurities in the brine, soda ash system and improved flexibility in the liming process. With current COVID restrictions, we are aware that this project will be delayed with first production expected to commence in financial year 2023. Over to 2020 financial year, including working on brine transportation systems, rain diversion channels, commissioning of the secondary liming plan, together with road and camping upgrades and new evaporation ponds.

Stage 2 will result in a significant step up in capacity and consequent reduction in cash costs from $4,000 per tonne, to around $3,200 to $3,500 per tonne. First production to be in financial year 2023, and ramp-up until full capacity of 25,000 tonnes per annum by financial year 2026.

Stage 2 volumes are expected to be fully contracted with strong demand for both lithium carbonate from Olaroz on hydroxide from Naraha from a range of cathode manufacturers, including the PPES joint venture between Toyota and Panasonic with whom Orocobre has signed an MOU to supply lithium hydroxide from Naraha and battery grade lithium carbonate from Olaroz. PPES are developing a battery manufacturing business to which we will supply up to 30,000 tonnes per annum of lithium carbonate equivalent from a combination of battery grade hydroxide and carbonate.

The strategy will be to feed non-battery grade lithium carbonate from Olaroz Stage 1 and 2 into Naraha to produce battery grade hydroxide, which will then go to supply PPES. We would expect to expand the Naraha into Stage 2 to support hydroxide volumes required by PPES. At the same time, battery-grade carbonate producer Olaroz Stage 1 will also supply PPES. This MOU with PPES along with other existing contracts will mean Olaroz Stage 1 and 2 and Naraha will be fully contracted by 2025.

Moving on to the Naraha Lithium Hydroxide Plant. Since construction commenced, there have been no LTIs recorded. Construction activities have progressed very well with more than 70% of planned works now completed. As of June 30, approximately $40 million have been spent on engineering civil work electrical instrumentation, fabrication and procurement at the Naraha plant. Site operations have continued throughout the period.

However, equipment delivery from overseas are expected to be delayed due to COVID, which is currently projected to delay final project completion by approximately two months, and we’ll see commissioning commence around mid-next year. We are well funded and have sufficient contingencies in place to complete the projects given total CapEx of $86 million – given total CapEx affecting millions, which compares to our funding in place of $92 million plus a $27 million subsidy to be received from the Japanese government; once the project is completed.

Neil, if you could please go with the equity raise details.

Neil Kaplan

Sure, Martín.

We use the equity rising to ensure we have sufficient funding to support Stage 1 and Stage 2 throughout an uncertain operating environment. There remains approximate to $85 million of equity funding requirements attributable to Orocobre, which we need to spend on Stage 2 and then additional $50 million of cash will be restricted to support any unforeseen additional cost requirements for Stage 2 as well as any funding requirements Stage 1 may.

The unrestricted cash on balance sheet represents an additional contingency to whether a range of possible pricing environments and any unforeseen costs or delays that may arise due to coronavirus. In addition, any part of the unrestricted cash balance not put towards Stage 1 or 2 can also be used to fund a future Olaroz and Cauchari or Lithium Hydroxide expansions. The capital raising is also positive action in response to anyone’s ability to deliver into customer demand as evidenced by the signing of the MOU with PPES.

Thank you. And I’ll now pass you back to Martín.

Martín Pérez de Solay

Thank you, Neil.

On Slide 23, the equity raising will be in the form of a fully underwritten under institutional placement to raise AUD 126 million at a 13.1% discount to last close. We will also be offering an SPP to eligible shareholders of up to AUD 30,000 to provide an opportunity for shareholders to participate in the equity racing. Here on Slide 24, we have provided an indicative timetable for placement through to commencement of normal trading and dispatch of holding statements earlier 2020.

Now I would like to hand over to Tara Berrie.

Tara Berrie

Thank you, Martín.

After a subdued start FY20, several promising signs emerged between September 2019 and January 2020. The Chinese market began the year in the state of malaise following further reductions, EV subsidization in July 2019. However sentiment in China began to improve in November2019 with the marketing of Tesla Shanghai Gigafactory, the prompt ramping up production to meet pent-up demand.

In January 2020, the Chinese Government announced the EV subsidy will be extended and provinces followed with supportive local policy. However, the accelerated spread of COVID-19 mid-to-late January hosted early signs of momentum and further slowed China’s economy. As the largest lithium demand market, China’s economic situation and EV demand has had a significant impact. As a result, it is the company’s view that 2020 lithium demand will be between 3% and 5% lower compared with 2019. Ex-battery segments, including: glass, ceramics and specialty products are expected to be hit hardest as end users are strongly linked with GDP and industrial production. Whereas the battery segment and its end-use markets are increasingly tied into technology adoption and sustainability efforts and can be targeted directly through subsidization as demonstrated by the EU.

These factors form the foundation of strong growth expectations, driving battery segments lithium demand to account for approximately 78% by 2025. In the second half of FY20 Europe surpassed China as the largest EV market in terms of sales units. From September 2019 through to February 2020, the European EV market rallied achieving consistent month-on-month growth on the back of more stringent carbon emissions policy. While this momentum temporarily stalled sold in April 2022 to COVID-19; Europe rebounded strongly as several governments extended or increased EV subsidization by up to 50%. Beyond this financial support, Europe’s long-term growth prospects have been laid down by heavy taxation on gas and diesel dulling impact of recent oil price decline.

With these short-, medium- and long-term measures, confidence has grown in Europe’s battery chain development and EV sales potential. While financial support outside of Europe has not been as strong continued reductions and bold predictions regarding battery costs suggest that price parity with internal combustion engine vehicles is in reach without the need for subsidization. This is increasingly becoming a reality through elimination or substitution of unnecessary and/costly materials while still maintaining or even improving key performance traits like range and power, economies of scales, branch efficiencies and technical improvements has enabled costs and capital intensity reduction shifting the EV industry closer to self-sufficiency. However, the same cannot be said with regard to the Lithium Industry. Energy improvements downstream have demanded tighter lithium chemical specifications, adding to production costs, through further purification to remove impurities.

Capital costs have also been driven up by the purchase of additional purification related plant during capital away from volume expansion, while downstream timelines compressed upstream timelines continue to exit. This misalignment is expected to drive a shortfall in battery supply ahead of the overall market. Variability between lithium resources, concentrated IP and experience is expected to limit the lithium industry’s ability to keep up with demand.

And now I will pass it over to Martín to conclude the presentation.

Martín Pérez de Solay

Tara, Regarding ESG, at Orocobre, we recognized as sustainability and [indiscernible] to the business and being successful that will lead to stronger results. During the June half we’ll release our first sustainability report with a significant enhancement to a sustainability section of our website. This now includes material information on how we approach sustainability across the business and performance data. Recently, this focus on transparent reporting of our sustainability month has been recognized by assay is a sector leading rating.

In summary market conditions remain difficult, but our operations are making significant progress in terms of safety, productivity, and quality. We see the current quarter pricing to remain soft, but there is some improvement in spot pricing, subject to external influences such as coronavirus, we see that demand fundamentals will have a positive impact on market conditions this year and into 2021.

Thank you, Rachel. We’ll now take the questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Nick Herbert from Crédit Suisse. Please go ahead.

Nick Herbert

Thank you. A few questions for me, please. I might just start with the MOU, the new off take you’ve announced. The comment you made there saying that it will minimize all the exposure to spot prices. Can you just expand on that? Whether that’s referring to hydroxide or the battery grade carbon Greg toddlers or, or the past three price, and then just interest in understanding how does it actually reduce exposure to spot pricing and then presumably it sits with a reference to a spot price. That’s question one? Thank you.

Martín Pérez de Solay

Yes. Thank you, Nick, for your question. The, agreement with PPES will mean that we will have a long-term pricing agreement, which will be based on market benchmark prices, but we’ll eliminate the need that we have been facing to sell into the Chinese port market shake whatever price was at that moment. That we have seen as one of our largest deficiencies and disagreement should help us to regard. The agreement will also – will not only income lithium carbonate from carbonate but will encompass lithium hydroxide produce from Naraha. So it would encompass both production, the 30,000 tons would be made out of carbonate and hydroxide.

Nick Herbert

Okay. Thank you. And next one, just on Naraha, can you talk through the economics of that a little more please. You’ve given the costs 1,500 a tonne. What sits below that line in terms of low in taxes just to get to moving costs and convenience? Could you also just talk to the transfer pricing broadly so we can get to a clearer picture of what that – what that opportunity looks like please?

Martín Pérez de Solay

Well, I will ask Neil to get you more detail on the cost. What I can tell you is on the trends from pricing, Olaroz will be selling on market price to Naraha. And Naraha based on a low cost of conversion should profit from the lithium hydroxide in terms of PPES joint venture.

Neil, if you have some more details on the taxes and structural cost that…

Neil Kaplan

Yes. And Nick, on specific Japanese taxes, I don’t have any information at hand. We can take it off-line and I can come back to you on that. But don’t have specific Japanese taxation rates. Obviously, the products sold would be taxed in Japan at the company rates that are currently applied in Japan. But I don’t have any other detail on that.

Nick Herbert

Okay. Is there anything else aware of outside of taxes that would be below that $1,500 cost you refer to?

Neil Kaplan

No, I mean, there’d be obviously non-cash you’d have depreciation. That’s exclusive of depreciation. So you’d have to include the appreciation. You’d have to obviously include interest, which is very low – very low interest rates on the facilities there. But as far as the operating cost we’d be looking at $1,500 a tonne.

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Nick Herbert

Okay. Thank you. And then just moving on to the price realization and the comment that you’ve seen the improvement and material improvement in August. And over sort of just put the numbers around that, and if you’re looking at that price on a similar product mix as to what has gone into your September quarter price guidance, based on what processes you’re seeing in the market today, where that realized price would sit?

Martín Pérez de Solay

Nick, we don’t kind of get into monthly processing. I’m supposed to say that July was a big tonnes a month. As we mentioned on the call, in the presentation, which was just below 50% of the forecast, 3,800 tonnes that we’re going to sell. The pricing is right down. We did take advantage of some very low spot processing to relieve warehousing and inventory transition as well as insured cash flow. So that’s – those were the two key drivers of that. So we’re going to have a September quarter, which is very line processing. It’s probably a lot of processing process quarter four for very long time now; I don’t know how many years. But we will step out of that in the December quarter. But certainly in August, the pricing was a lot better than July.

Nick Herbert

Okay. Thank you. And then final one to see you as well, Neil, if that’s okay. And just want to be 100% clear on the funding position now for Stage 2. And so you’ve got $85 million remaining equity contribution and in reference to the $50 million in restricted cash needed for contingency. And I guess to that; one, are you comfortable with that $50 million contingency would essentially cover all of – or most of the sort of reasonable downside scenario that you can say play out on the sustained COVID delays and pricing pressures. And two, just in terms of unencumbered cash, post the placement available on Stage 2, is that around that $193 million mark, so it’s excluding essentially what was committed to Naraha?

Martín Pérez de Solay

So I’ll start with your first question, and the $85 million plus the $50 million makes the $135 million that we’ve been talking about continually. Originally $135 million was earmarked as the guarantee 75% of the handle, $90 million loan that will be taken that will be taken that we’ve been drawing down from Mizuho. As we draw it down, we’ve got to put those funds aside as a reserve funds. The point is a month ago, as advised in our quarterly, we looked into – we agreed that $60 million of it could also be used for Stage 1 in case there any shortfalls due to pricing, due to principal repayments to Mizuho et caters, et caters. So the $85 million that are in the sources and uses of funds is basically to some Stage 2 for the various costs of CapEx, working capital and VAT. That’s a base case you’re seeing there. We then have another $50 million of reserve funds that are available for Stage 2 as well as for Stage 1, which is a requirement. So that makes up the $135 million.

With the capital raise, we’ve gone in the number in the $101 million of unrestricted funds. So in a downside case where we did stress down some – in terms of reduced pricing for extended periods, increased CapEx due to coronavirus delays, et cetera and we’ll be well-funded with $101 million. So that provides us flexibility, a robust balance sheet and if there is ongoing weakness in the market, as well as the uncertainty of coronavirus.

Sorry, I spoke for so long and that I can give your second question?

Nick Herbert

No, that covered it. It was more around whether you’re confident that contingency, $50 million covered most downside scenarios, but that sounds like it does.

Martín Pérez de Solay

Thanks, Nick.

Operator

Thank you. Your next question comes from Reg Spencer from Canaccord. Please go ahead.

Reg Spencer

Thank you. Good morning, Martín, Neil and guys, quite a bit to digest this morning. Just like to start with a follow-up question to Nick on that expected September quarter pricing. Can you maybe provide a comment on how that $3,000 – or circa $3,000 a tonne figure might relate to similar quality or similar spec product in China today? Is there anything different about that material that sees that price so low relative to what I can see via various price reporting agencies?

Martín Pérez de Solay

We’re just assigned retaking the call – the answer, Rich. I mean, basically, below pricing – it’s not to do with the material. Yes we competing with the Chinese, the Chinese marketing in that aspect, but it’s a spot price that was taken as I mentioned too. So nothing to – there’s no issue with the quality. It’s our standard prime industrial grade. No issue with the quality. We just took advantage to turn inventory into cash and relieve excess inventory at Olaroz.

Reg Spencer

Okay. That’s thanks Neil. And then just on that inventory…

Martín Pérez de Solay

But we were producing at a higher rate

Reg Spencer

Okay. Sorry, through the first half of this calendar year, is that what you mean by that?

Martín Pérez de Solay

We are producing at a high production rate, which we then reduce to meet the demand. We are forecasting sales in the range of 13,000 tonnes, which ended up being only 10,500 tonnes. So we not only have to reduce the production rates at the plant, but also we kept a lot of inventory that we sold down in the month of July, taking these low prices that Neil just mentioned.

Reg Spencer

Okay. That’s fine. Thanks. And just where that inventory might stand now. Remind me that inventory number at the end of the June quarter would have been circa 3,000 tonnes to 3,500 tonnes. And given your expected sales for this quarter that should drop to circa 1,000 tonnes. Is that where we stand now?

Martín Pérez de Solay

Between 1,000 tonnes to 2,000 tonnes.

Reg Spencer

Okay. Thank you.

Martín Pérez de Solay

Okay. Yes, it’s closer to 2,000 tonnes. We usually keep two months of sales and inventory with an average quarter sale of 3,000 tonnes, 3,500 tonnes, that’s it. It was slightly higher than that in the June quarter.

Reg Spencer

Understood. I might just jump across now to the supply arrangement with – or the MOU with PPES. Are you able to say what the split would be between battery-grade carbonate and hydroxide? And then as a follow-on question for that, clearly, the scale of that supply contract necessitates even – potentially even a significant expansion of what you have outlined is building at Naraha. And can you maybe comment on the timing of any subsequent expansions at Naraha at this time?

Martín Pérez de Solay

Well, that those things will have to be yet discussed and agreed. A significant portion of the 30,000 tonnes would be hydroxide over time. So increasing our hydroxide production capacity is something that we now have to focus on and start working. Also, the – all of the production from Naraha will be devoted to PPES. And I said before, since the requirement of hydroxide – battery-grade hydroxide is going to be larger. We are planning to – we will have to expand that capacity, and we’ll have to start this our discussions and agreement with TTC and PPES going forward in order to be able to meet those needs.

Reg Spencer

Okay. Thanks Martín. And so with the – from the capital raising, then, it’s a bit early to say what capital requirements there might be for subsequent expansions at Naraha and timing from that but suffice to say that the amount that you’d be looking to raise would – there may be a provision in there to cover some of those costs?

Martín Pérez de Solay

Indeed.

Reg Spencer

Okay. Thank you. I will pass it off.

Operator

Thank you. Your next question comes from Glyn Lawcock from UBS. Please go ahead.

Glyn Lawcock

Martín, good morning. Martín, just going back to the joint venture offtake. Just wondering, could you maybe help me understand, are there any penalties or issues around that ramp up that you’ve given us? Is it a take-or-pay and from their perspective, but from your perspective, if you don’t deliver other penalty to you? Just trying to understand? Or is it just the best endeavors contract? Thanks. That’s the first one.

Martín Pérez de Solay

At this point in time, it’s just an MOU that doesn’t have any penalties, no take-or-pay or delivery pay losses. We will now sit down to negotiate a binding agreement that will get into those types of usual chance of commercial contracts.

Glyn Lawcock

Okay. Do you envisage it being a take-or-pay? Is that something that you’d like to see? In exchange, I guess, you then have to promise to deliver? Or will it just be best endeavors. What do you think it could end up like? Or where would you like it to end up?

Martín Pérez de Solay

No, we envision a commercial contract. Well, I would like to end up in a contract that will give us reliability on our ability to place the product. And at the same time, we’ll give enough flexibility for our customers to be able to accommodate their needs. So most likely maybe a take-or-pay, delivery pay contract with the standard provisions of makeup inventory and be able to advance or delay deliveries of products so as to minimize the costs from straight take-or-pay delivery pay losses, take into consideration that these companies with very good intentions. And we know each other very well. So the objective of this is to improve the commercial for liability for both parties rather than to impose penalties on the other.

Glyn Lawcock

Okay. The second question is just the $5 million per month cash burn you quote, just – I assume that’s just Phase 1. If you had to put Phase 1 into care and maintenance. And does that include or exclude the principal repayments as well, that $5 million per month?

Martín Pérez de Solay

That is…

Neil Kaplan

Yes. So what that number is, Glyn, is basically, we have a look at – if we shut down completely, what would it cost per month to just hold – if we had a big coronavirus outbreaks or something, to shut down Borax, shut down SDJ put it into care and maintenance. Obviously, we’ve got our corporate offices as well as finance to pay the interest. So that’s interest. The $5 million a month basically covers that care and maintenance for corporate Borax, SDJ and interest payments. It doesn’t include principal repayments.

Glyn Lawcock

Okay. So it excludes the principal. Okay. Then I guess my next question is just if we go back – it’s only four weeks ago, we were on a call with you for the quarterly. At that point, you would have already known you’d sold volume at a very low price in July because it was the 30th of July when we met. You’ve done a deal with your joint venture partner to access restricted cash. Yet four weeks later now, we’re raising money at a lower share price than what it was back then. What changed in four weeks?

I mean, four weeks ago, we thought we had a company that could weather the storm. You’ve done a deal. You knew about the low price, and prices are now actually improving as you said. I’m just trying to understand what’s moved you to do this? Is this a contingent get the offtake agreement signed, if you need to raise may need to raise may provide more liquidity? Or what’s changed in your mind? Thanks.

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Martín Pérez de Solay

So, Glyn, what happened if we started looking into what could happen if the current scenario continues to be longer than expected if the app or the churn that we saw in August, it’s only a month. And in that event, if COVID restrictions continue and if prices do not improve significantly, we would have been with the skinny cash company or has to have enough cash flow – excuse me, that cash reserves and flexibility. The market is evolving. We are starting to think of increasing hydroxide production capacity for this new MOU.

And we can’t – we have to derisk the company and run the company on short cash position is despite it enough to probable needs. It’s quite risky. If anything happens different from what you expect, we would be in trouble. We thought it was the right time to do it. When we don’t need that being forced to do it when you run out of cash and you’re forced to take anything that it’s up to you.

Operator

Thank you. Your next question comes from Rahul Anand from Morgan Stanley. Please go ahead.

Rahul Anand

Hi, Martín. Hi, Neil. Thanks for the opportunity. Look, I might start with the achieved pricing, and apologies, I know it’s been talked about a few times. Should I reconfirm that 3,000 to 3,200 number that’s been flagged is basically assuming all primary products, and there’s no battery-grade in there?

Martín Pérez de Solay

Yes. That’s mainly exactly, Rahul. That’s mainly prime grade product exact industry.

Rahul Anand

Okay, perfect. And then if we move to Slide 18, there’s a couple of things there that I wanted to talk about. So the first one being the Stage 2 to significantly improve cash costs. So it talks about Stage 1 being at $4,000 and then one and two combined being at the $3,200 to $3,500 per tonne mark. Does that sort of indicate that Stage 1, $4,000 a tonne is basically the best it can do without Stage 2 coming on? Or is this basically just today’s production? And once you get to the full ramp-up capacity that this $4,000 number looks better on a stand-alone basis for Stage 1 as well.

Martín Pérez de Solay

Well, the number is calculated, assuming a mix of Stage 2 full on primary product and Stage 1 moving more on to purified than what it is today and still producing some primary depending on the need for further conversion into hydroxide. So that assumes that production of primary from the Stage 1 should increase from the current – purified from Stage 1 should increase from current percentage.

Rahul Anand

Right. So then, I guess, so $4,000, if I read it correctly then, is the ramp-up production cost of Stage 1, producing a mix of battery in primary? And what percentage of battery grade, does that assume the $4,000?

Martín Pérez de Solay

The cost that we have had this year with an average of roughly up to…

Rahul Anand

Sorry, I didn’t get that Martín. Could you say that again, please?

Martín Pérez de Solay

The $4,000 is a current number, and that is based on the percentage of battery…

Rahul Anand

Okay.

Martín Pérez de Solay

The $4,000 is based on the current production and it’s based on the roughly 30% purified product that we’ve been producing throughout 2020.

Rahul Anand

Okay. Just 30%. Okay, perfect. And then the top of this slide talks about this 15,000 tonnes per annum to 17.5 by FY 2022. Is that sort of can we take that as guidance in the sense that you’re planning to get there? Or is that a rate that you hope to achieve at some quarter as an exit rate in FY 20222 for Stage 1, please?

Neil Kaplan

But there’s a range there because it will depend on the amount of purified product that will run through the plant and certain improvements that we’re doing on the plant. If we run primary product, output of the plant is larger than if we run purified which runs at a lower rate than the other primary output. So that’s the hypothesis on a range of different primary and purified product outcomes from Stage 1.

Rahul Anand

Okay, perfect. So, I mean, if you’re doing just primary than you can be at – or you’re expecting to be at 17,500 tonnes in FY 2022 for the full year.

Martín Pérez de Solay

Rahul, I didn’t get that. What?

Rahul Anand

15 to 17.5 Martin, that’s basically your expected range for FY 2022. It’s not an exit rate.

Martín Pérez de Solay

You are right. We should be able to get there. Yes.

Rahul Anand

Okay, perfect. Coming back to the Naraha Stage 2 question Martin, I mean if we do the numbers on where the current battery grade production is from Stage 1 and what you’re expecting from Naraha and also the flagged linear schedule…

Martín Pérez de Solay

Go ahead Rahul.

Rahul Anand

Yes. Okay, perfect. So Stage 1 battery grade production capacity, I guess is between 20% to 30%, and then you’ve got the 10,000 tonnes hydroxide coming on in Naraha. If you look at the delivery schedule for the potential new MOU, this would suggest that you’d basically be required to start thinking about Naraha Stage 3 pretty much in calendar year 2020 to have that up and running basically by calendar year 2024. So is that sort of how you’re viewing this chart as well or are there some other levers you can pull? And then how should we perhaps think about potential CapEx spent for Naraha Stage 2? Thanks.

Martín Pérez de Solay

Well, it would all depend – well, it depends on how the next six to nine months. We will devote it to transforming this MOU into commercial agreement. And that would tell us a lot about the volumes from the different products that would be required to meet those volumes and the ramp up goes well. Naraha will start with 10,000 tonnes of lithium hydroxide, which should be in Africa over the first two or three years of the MOU. After that yes, we will plan to improve the hydroxide capacity and we will do that well in advance.

If we have made any plans ready, the answer is no. If we are providing to have cash to invest in that, the answer is yes, we’re getting ready for that.

Operator

Thank you. Your next question comes from Bria Murphy with BMO Capital Markets. Please go ahead.

Bria Murphy

Hi, thanks for taking my question. Most of my questions have been answered, so just one for me. Can you talk about why you decided not to curtail production, given negative margins? Is there a risk that lithium price recovery may be slowed down if capacity is in closing even when it’s loss-making?

Tara Berrie

Yes. Sorry Bria, Could you just repeat that…

Martín Pérez de Solay

I would ask Tara to answer your questions?

Tara Berrie

Sorry, Bria would you mind repeating that?

Bria Murphy

Yes. So just wondering if you could talk about why you decided not to curtail production, given negative margins in the September quarter and then is there a risk that lithium price – with lithium price recovery maybe slowed down if capacity is closing even when it’s loss-making?

Tara Berrie

Sure. I guess, the decision was made because we were in advanced discussions with our customers to – even though it is on a spot basis, we had existing negotiations with our customers. So even with that foresight on pricing, we needed to continue production. In terms of price, we believe that it reached the button and so the best decision for us with continuing to production and fulfill those customer orders.

Bria Murphy

Okay. Thanks.

Operator

Thank you. Your next question comes from Levi Spry from JPM. Please go ahead.

Levi Spry

Hi guys, just two questions I suspect. Maybe just a been more of a helicopter, so you said you raised enough to cater for an extended downturn the scenario. Can you run me through the assumptions for all that, particularly given that you’re also waving the potential for another round of the CapEx at Naraha Stage 2, and maybe you can talk through exactly what needs to be on [indiscernible] MOU to be converted into a signed contract, is it actually firming up in the Naraha Stage 2. Thanks.

Neil Kaplan

Are you there Martin? Martin is talking, but it’s coming through, there’s no voice.

Martín Pérez de Solay

Sorry, I was in mute. I was telling you that there is no detailed calculation of expansion of the hydroxide capacity. We are planning that we will have to do that and start moving and spinning our wheels in that direction, that’s why part of the excess cash that is being raised in this equity raising racing would be devoted to the project. However there is nothing yet firmed up. And yes, now we enter a six to nine month period to firm up the MOU intellectual binding commercial contract.

Levi Spry

I understand. Can you give us any data on what the key items you’re negotiating on?

Neil Kaplan

Martin, you’re muted again I think. Martin, we can’t hear anything.

Martín Pérez de Solay

Sorry. I was telling you that the negotiation would be around the actual split between different products, the testing of the Naraha product, the Olaroz product [indiscernible] tested. My line is not working properly then Neil, maybe if you can answer that for me, please. Can you hear me?

Neil Kaplan

Yes. Okay. Thank you. And maybe just the assumptions around, I mean …

Martín Pérez de Solay

Neil, why don’t you answer, my line is not working properly, seems to be…

Neil Kaplan

That’s okay Martin, I’ll pick up the questions. Levi, are you good with Martin’s response on the one before.

Levi Spry

I guess. And maybe Neil, just walk me through the assumptions behind how much runway you have processed don’t recover?

Neil Kaplan

Well, the runway is probably we’ve looked at what we did with the stress testing Levi, we looked at extended low price as well as increases in CapEx for an extended period. And if you look at that sources and uses of funds is a little over $100 million that would get us through for at least about three years in real bounce on a case of long extended week processing and increases in CapEx due to COVID. So we stressed that heavily. So basically yes, that’s – those are the main assumptions and we looked up to three years and that was it.

Operator

Thank you. That does conclude the question-and-answer session. I’ll now hand back to Neil for closing remarks.

Neil Kaplan

Martin, can– do you want closing remarks or – close it up? Well, thank you very much to everyone for listening-in and calling-in.

Martín Pérez de Solay

Line is not working properly here Neil, if you can do that.

Neil Kaplan

No problem. No problem. Thank you again for calling-in. I think we’ve achieved a milestone with a very large contract. We do have other contracts in place. We expect to be sold out possibly beginning in 2023 financial year certainly by 2025. With other contracts we have pluses PPES, it’s a key milestone, what we’re raising now just in terms of setting us up for the future in these uncertain times. And we still remain big believers in the lithium EVs and the future of it.

So thank you all for attending the call and look-forward to – I can’t say road show, because I think we’re all sitting in the home a lot of us, but we’ll talk soon. Thank you.



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