Calix Limited (CXL) Earnings Call Transcript & Summary

Good morning, and welcome to Calix Limited's Investor Webinar following the successful $60 million institutional placement announced yesterday to the ASX. From the company today, we have CEO, Phil Hodgson; and the CFO, Darren Charles. Before I hand it over to Phil to get started, I'll just remind you that we will conduct a Q&A at the end of this session. [Operator Instructions] I'll now hand it over to Phil to get started.

Excellent. Obviously it's been a conclusion of a capital raise for Calix Limited, a $60 million placement with strong institutional interest from domestic and overseas investors. And so what I'd like to do today is to take you through, I guess, a little bit about that, a little bit about why we did this raise now and what for, and also at the end, cover off a chance for our existing shareholders at the record date to take part of the share purchase plan for the company. I'll just scroll down through to, first of all, I guess, the core technology. For some of you who may not know Calix, who we are and what we do, I'll give a very brief overview before I move into the purpose of the cap raise and where we're going to be placing that capital. Basically, Calix is an Australian technology. It's a new type of kiln or furnace. As we say, a new way to heat stuff up. And in a traditional kiln or furnace, what's happened for sort of 5,000 to 7,000 years is you put how you heat and what you heat in the 1 vessel and light a match. And so that same principle hasn't changed. What we do is a little bit different. We separate how you heat from what you heat. And we do that with a rather large steel tube. I usually demonstrate that with a little [ prop toilet roll ] here. And with this steel tube, which we've built out to sort of 2 meters in diameter and over 32 meters height, we heat this tube externally up to about 1,000 degrees centigrade. Now we can heat that with fossil fuel. We can heat it with biomass. We can heat it with waste. We can heat it with electricity, renewable electrons. And so the kiln is ready for the energy transition for a start. And we heat this something about 1,000 degrees centigrade. And whatever we heat, we put down the middle. It needs to be quite a small particle size, maybe about 1/3 of a millimeter or less. If you hold a lump of flour in your hand and build a particle size of flour, that's roughly the size that we like. And I mentioned dropping that flour to the floor and watching it float down, well, that's all we do inside our tube. We drop whatever it is we're trying to heat up. It floats down to -- through the tube. And the red hot walls of this tube radiate heat into those particles, and that's how we heat them up. We don't touch flames and smoke, et cetera, onto the particles. We keep that completely separate. We use the tube to radiate heat into those particles. So why do it this way? Why is that so important? Here's the second prop I usually use, which is a rock. This rock is a lump of limestone. Nearly half the weight of this rock is CO2 trapped in the rock. And when the cement and lime industries heat up limestone to make cement and lime, they release that CO2. Now the cement and lime industry is responsible for roughly 8% of global CO2 emissions. And in the cement and lime plant, 2/3 of those emissions are coming from this. Not from how they heat, not from the fuel they use, it's coming from the rock versus their feedstock. And so if you can imagine with our kiln that we're heating externally and we're putting the cement meal or the ground limestone down the middle, as the CO2 comes out of those particles, it's not mixed with those furnace gases. It's not mixed with how they heat. That CO2 basically comes back out the tube. That's a pretty pure stream. And so what this represents is a new type of kiln to directly separate the CO2 that's coming out of the rock, the raw material for the cement and lime industries. And so just by having and heating a different way, we have a CO2 or decarbonization technology for the cement and lime industries. There is a couple of other projects we're going to talk about with respect to why we've raised some capital today. Another project that we're doing, we don't put the limestone down in the middle. We put what's called spodumene concentrate. And now spodumene, you may or may not be aware, is the source of the majority of the world's lithium today. Mined in Australia, currently exported across Korea or Japan or China to be turned into lithium for batteries. And that export is sort of 94% waste currently. Only 6% lithium. What we're doing with Pilbara Minerals is putting together a project where our little calciner, taking fine particle spodumene. Currently, those particles can't be put in current production to produce lithium. But we can handle it because we can handle small particles. And so a project that we're putting together with Pilbara Minerals with our kiln to process their spodumene fines and turn it into a lithium salt for export. The third application that I'll talk briefly about today in terms of the capital raise is green iron and green steel. Now iron and steel is responsible for about 7% of global CO2. So along with cement and lime, 15% of global CO2. So iron and steel is one of those also very hard to abate industries where carbon is burned in blast furnaces with iron ore to make iron. What we're trying to do and what we've successfully developed to date, just a pilot scale, is to use hydrogen. And we heat up the hydrogen inside our tube. We can heat that renewably, as I've mentioned before. And by putting iron ore in the top, the hydrogen rips that oxygen off the iron ore to make iron. And so what we -- we don't lose that hydrogen into a furnace, which other technologies are looking at. We basically keep that hydrogen separate. Hydrogen is the most expensive part of making green iron or steel. And so the 1 core technology, I've talked about cement alone, I've talked about spodumene processing to lithium, and now iron and steel as well. So that's why we call it a core technology platform widely applicable across different industrials and some pretty exciting projects that we're developing, hence, the capital raise. If I move down quickly to Calix as a company, some of you may not be familiar with what we're trying to develop this into. I've talked about the right-hand side of this slide, which is the CO2 mitigation part, the lime and cement. Importantly, that bid is starting to spin out. We're starting to see external investment into that. Carbon Direct came in for 7% of that business for EUR 15 million in late 2021. Carbon Direct impact fund from the U.S. And so that particular deal was very important for the company because it started to show how we can introduce capital into various parts of the applications we're developing and leaves Calix as a head company to focus on developing these different technologies into different applications. We'll always have 30% of the royalties of that business, no matter what equity we ultimately hold. Even though we currently hold 93%, we'll always earn 30% of the royalties on their business as part of our licensing arrangement. If you have a look at the next column across, which is sustainable processing. This is where we're using the fact we can heat this with renewable energy. This is what we're doing with the spodumene opportunity. This is what we're doing with the iron and steel opportunity. So they all sit in that sustainable processing space. So I really concentrate on those 2 columns today, which is industrial decarbonization. We've also got some interesting work we're doing in advanced batteries, biotech and water, where we're using the unique properties of the same core technology. We're not touching the particles, but processing there with flames and smoke. We can make high purity in very highly active materials. And so that material science is also a capability of this on core technology. So quite a varied business, as you can see, but really interesting in the last 2 years, the focus around industrial decarbonization and the pace at which that opportunity is developing for us is very exciting. Just in terms of the -- this is a rather busy slide, so sorry about that. But in essence, all it covers is the work that we'll be doing on developing the CO2 for lime and cement. The fact that this is responsible for a large part of the industry's emissions, the fact that we've already developed this project by piloting in Belgium with HeidelbergCement and a consortium of other cement and lime companies such as Cemex, such as CRH, such as Lhoist. And out of that pilot study, we already have an idea of where this technology should cost in terms of euro per tonne of CO2 separated or mitigated from the cement and lime plan. The great thing is, this has the potential to be lowest cost because we're not adding a new process to the cement and lime process. We're just heating in a different way. And so compared to another technology called [indiscernible], it's like a chemical plant, it sits at the end of a cement plant, to suck CO2 out of the flue gas. And then that chemical, once it's sucked that CO2 out, it's reboiled. It's a higher capital cost. It's a higher operating cost. And although that technology is being looked at because it's quite mature, it's been in the oil and gas industry for 60 years, it's been looked at the cement. And so therefore -- but the problem with that technology is it's always going to be costly. So our aim is to bring our technology at lowest cost. Just in terms of where LEILAC is, which is our Low Emissions Intensity Lime And Cement. If you remember, we own 93% of the Leilac Group along with Carbon Direct. Just this part of our business is building a project pipeline. It's quite interesting. I mentioned before that we piloted this project in Belgium called Leilac-1. That proved the technology worked at a mere 25,000 tonne per annum CO2 separation scale. I know that sounds like a lot, but there's only 5% of the throughput of a single cement plan. And that was a single tube. Leilac-2, which we're currently into detailed design and construction with HeidelbergCement at a cement plant in Hanover in Germany. That's 4 of these, 4 tubes, 100,000 tonnes a year of CO2 separation. So that's now in this particular stage. But what's really interesting is the growth in the project pipeline. And again, the last 2 years has been very important for, I guess, us in the world. 2 years ago, no countries have committed to net -- targeting net zero CO2 by 2050. Hardly any companies had. And so the dramatic change that's happened in the last 2 years in terms of commitment to net zero by industries and by governments has really driven interest in the technology. And you can see here in the project pipeline, just over a year ago, August '21, we had about 34 projects in our pipeline, and that has now nearly doubled in the space of just over 12 months. So these are projects that are with multiple different companies. Obviously, there's companies in our consortium that we're using to develop the technology. But there's other companies as well, other cement and lime companies who are interested in developing the technology to help mitigate their ambitions. The ones that we can talk about in the public domain, Boral, Adbri and Tarmac. Boral and Adbri are interesting because in May, the federal government announced $41 million in funding across both of those projects. And part of the cap raise today -- sorry, that we've just completed, I should say, part of the cap raise were just completed, is about accelerating those projects now. And so really interesting, the fact that the pipeline is starting to fill very quickly with projects. Leilac-2 is our key proof point for the technology. It's about building out a 4-2 module. But then scale up from there is much easier because all we do is we take that module and we multiply that out to meet the capacity required for a specific cement or lime plant. Just in terms of the catalyst, I guess, as well. I talked about some projects that we really want to start to accelerate and progress. But the most important catalyst for raising some capital has been the first commercial agreement for the technology with Heidelberg Materials. It used to be HeidelbergCement, recently became Heidelberg Materials. One of the majors -- absolute cement majors globally. Several years of negotiation, but finally, they're on the license and royalty type arrangement with Heidelberg Materials for the technology. Now this is the first for the industry, a technology provider to the cement industry or lime industry, has not been able to achieve this style of arrangement. It's always been, we'll build the equipment and try and make a margin limit. But to scale the way that this technology needs to scale between now and 2050, we will need to build full-scale plants, 2 of them every week from now to 2050 if we are to meet the mitigation requirements, CO2 mitigation requirements for the industry. And so a build sort of approach where we're trying to build every single one of them is just not going to work. It's not going to scale quickly enough. And so this deal with HeidelbergCement validates a business model that we've been talking about for 2 years, a bill, a license and royalty arrangement where ultimately we move through to what we call a blueprint stage of our business model. We just basically sell those blueprints, if you like, or license those blueprints to end customers. They pay us a royalty or license basically on a fee per tonne of CO2 basis to utilize our technology. They can get whoever they like to build it. And so again, that doesn't restrict the scalability of the technology or the spread of the technology. And so reaching this agreement with Heidelberg is highly important, both for our business model and for quick scale of the technology. Then the structure of the license agreement, I can talk about. Unfortunately, I can't talk about the specifics, the commercial in confidence with Heidelberg. But the structure of the agreement is a floor. So there's a minimum amount of euro per tonne of CO2 that I can't tell you the number, but it's a minimum amount that is paid as they develop -- as they utilize the technology. There's a variable component in there, which is linked to the value of CO2. Now CO2 has a certain value in Europe, for example, because there's an emissions trading scheme there where CO2 permits are bought and sold on market. And so the royalty stream, if it's above the floor, is linked to the value of that CO2. There's also a cap on that royalty. So one of the things that we agreed with HeidelbergCement was that because we're targeting lowest cost technology, we're pretty confident that we'll be below anyone else. But if not, to say new technology starts to emerge, it starts to get close to us in terms of cost, we have a cap there. So that HeidelbergCement is guaranteed that they're paying the lowest amount to mitigate their CO2. The incentive for us, of course, is to keep lowering the cost of our technology to keep innovating. And so as we do that and lower our cost, obviously, the collar, if you like, the region that we can earn extra dollars for doing that, depending upon the value of CO2, flows back to us. So it's a good incentive for both companies. Heidelberg guaranteed lowest cost. We're guaranteed some extra reward as we continue to innovate and drop the cost. So highly important catalyst for us, highly important validation of our business model and a first of a kind for the industry. Just in terms of the opportunity, again, this next slide is a little busy, but rest assured, when I describe the scale of the problem faced in the industry and the scale of the opportunity for technology such as ours, even if we only get a small market share, let's say, 10% of the market share between now and when that industry is decarbonized, we're talking hundreds of millions of tonnes per annum of CO2, 135 or 10% of market share. And so yes, depending upon where that royalty ends up with the value of CO2, you can start to do the calculation of the value of this particular technology should it be successful. We've got to scale it up. The Leilac-2 module, which is 4 of these tubes, if you remember, is our critical commercial demonstration plant and scale. The key challenges with the technology in scaling is to make sure that we integrate the process and heat streams as we retrofit onto an existing cement plan. It's not a sort of bifurcated outcome. Leilac won't prove the technology work for us. It's more how efficient can we get it. And so really, it's an engineering problem and some engineering challenges to make sure that we get it as efficient as possible, get our costs into the lowest range as possible and maximize the royalty returns that we can, therefore, make depending upon the price of CO2. Just in terms of -- I'll just jump down quickly to where some of this funding is going. So there's about -- if we look at the total placement, there's AUD 60 million in the placement. We're targeting $8 million to help with our Leilac-2 project in Hanover in Germany. So this project previously was funded EUR 16 million by the EU, EUR 9 million by the industrial participants, including the Leilac Group. And over the course of the last 6 to 12 months, obviously, there's been quite a few inflationary pressures that have come through. And so what we wanted to do is make sure we can continue to move ahead and deliver this project even though there's some inflationary pressures that have come through on the supply chain, on through commodities such as steel, et cetera. And so we thought it prudent to go and get a bit extra cash that -- to cover that so we can continue to move ahead with this project and deliver it. We're agreeing and in substantive discussions with Heidelberg on jointly covering that overrun. So obviously, HeidelbergCement just as interested in us and progressing. And so we want to make sure we can cover our part of that overrun. It's about AUD 8 million, EUR 5 million. So we're not expecting the overrun to be dramatic. And it's an overrun just in cost of materials. It's not an overrun in terms of scope. And so again, in substantive discussions with Heidelberg. We thought it prudent now, given the license agreement to go and get that capital so that we're not, again, left short or left to come raise on the market or certainly not in a position of commercial weakness as we negotiate the terms of the way Heidelberg and us will put that deal together. Key thing also about this particular deal is, of course, as we build Leilac-2 and prove it out, that capital that we've put in to help with the cost overrun can get recycled. So it's got to hit some operational proof points. But should do it so, Heidelberg will continue to keep that plant and run it and buy effectively that asset back office, and we can recycle that capital. So important discussions, important for us to have the commercial strength in those discussions to get the best deal, but also equally is important to continue to move ahead with Leilac-2 as quickly as we can to get that plan built. Target completion is 2024. So we're getting into -- as I say, we're in detailed design now. We're starting to get into long-lead item procurement, and we need to be -- we just wanted to make sure we had enough buffer there for the inflationary contingency. The second application of the capital we've raised is for 2 projects here in Australia, the Boral project and the Adbri project, both announced with government funding in May this year. And again, with the HeidelbergCement license agreement established, that establishes our business model and start to focus commercial discussions and concluding the commercial discussions and project discussions with both Boral and Adbri to achieve these projects. The Adbri project was announced with $11 million in funding. What we're proposing is that we contributed $15 million in capital upfront to move this project through as quickly as possible. Again, we're in discussion to conclude a deal where, should it hit operational agreed targets, that Adbri will continue to operate that plant and we'd recycle some capital from that. And then similarly for the Boral project as well, $30 million funding announced, $15 million funding that we would contribute to make sure that we can help derisk it for Boral and accelerate it. And should it hit the operational -- agreed operational performance, that, that capital would be recycled. And again, with both projects from then on, the license agreement would apply. So this is about putting a little bit of equity at risk, a little bit of equity at play to deliver these projects, to help speed, again, the deployment of this technology in the lime and cement industries. These particular projects are perhaps a little different from a cement plant. A lime and cement use the same thing, but they're slightly different industries. Cement obviously making clinker and onto cement. Lime is used in all sorts of things. Lime is a raw material or raw input into steel production and aluminum production, et cetera. And so these -- both these projects, we're looking at lime. The second -- or the third piece of the capital raise, third piece of the placement allocation is spodumene application that I talked about at the start of the call, where we're taking effectively what's a waste stream from Pilbara Minerals, spodumene concentrate circuits as called. So Pilbara mine spodumene ore. They concentrate that up as best they can. As I say, the standard is about 6% lithium. And currently, that gets shipped offshore for processing into lithium, being only 6% lithium, 94% waste. And so what we're trying to do here is have a look at some, what's called flotation fines, very small particles that are unsuitable for normal kilns. They either get blown out or melted, and you can't extract the lithium from them. What we're going to do here is, again, using our technology, have those spodumene flotation fines as the feedstock and crack them open, heat them up and crack them open. Not overheat and melt, but just enough to crack them open, that you can then extract the lithium, having cracked open those tiny particles of ore. This particular project, we've been speaking about for some time, 18 months. We recently signed an MOU in June. And we're in final documentation now and are ready to commit to this project. And so given the catalysts that I talked about with the other projects, we felt now is the time to go and get the capital to move ahead of this project. What's interesting with this project, it's a 45%-55% joint venture with Pilbara Minerals. We're contributing 35% of the capital. Our intellectual property is giving a 10% free carry in this deal. And we're targeting 3,000 tonnes per year of lithium salt. What's interesting is when we first put this project together, I think the value of lithium was maybe [ USD 10 to USD 12 ], or maybe a bit more $1,000 per tonne. And so we're hoping the demonstration plant that we put together people would make a better money, but certainly wash its face but prove the technology. What's really interesting is over the course of the last 18 months, we're seeing the lithium price dramatically increase. As lithium demand increases with EV production batteries, we've seen lithium move up well north of sort of USD 70,000 a tonne now. So what was a little demonstration project to prove out the technology to the scale is actually looking quite interesting because if you look at current lithium values, then the value of 3,000 tonnes per annum of lithium salt is well north of USD 180 million to USD 190 million. So the little demo plant that we're building with Pilbara is suddenly a commercial sort of demonstration plant. Obviously, it's there to test the process and prove it out. But in and of itself, it's now a very interesting commercial proposition. Suffice to say, Pilbara Minerals and Calix are progressing as fast as possible with this project now. We're already in FEED study or feasibility. We've had the bench scale hydrometallurgical piece built out. So this is -- if you see the diagram there, that's the big tall tower there [indiscernible]. But there's all this area down here, which is all about extracting the lithium from those tiny particles. That's called hydrometallurgy. And so that particular piece, we've already constructed and commissioned bench scale, we've already produced 75 kilograms of lithium phosphate salt. And that is already off to be assessed by some customers or potential customers for their business. Why go into lithium salt production using this particular technique and technology? It's all about the carbon footprint. We're going to be using -- we're capable of using solar energy for this particular -- for our part of the technology. We're eliminating a huge amount of transported waste from the supply chain by not shipping raw material or raw rock offshore basically or spodumene concentrate and producing a lithium salt here. And also, we're producing 2 components of the fastest-growing battery chemistry. We're producing a lithium phosphate salt. The fastest-growing lithium battery chemistry at the moment is lithium-ion phosphate. Every Tesla 3 in China now has a lithium-ion phosphate cathode. And so in shipping 2 components of a battery in the world, we, again, get extra utility associated with the product. That also helps take carbon emissions out of the supply chain. Lastly, why is carbon emission so important? In 2024, the EU will start putting a carbon tariff on goods moving into EV being imported into the EU. It is the fastest growing electric vehicle market. And so the ability for a lithium salt to have a much lower carbon footprint is going to be an increasingly competitive advantage as these sorts of tariff barriers, carbon tariff barriers coming to be. So a great project with Pilbara Minerals. And we've now got the capital to pursue that as fast as possible. We want to get the feasibility study completed within the first half of next year. We want to get this plant up and running within 2024. And so we're on a compressed and enthusiastic and accelerated time line to do that. The last little link of capital out of the $60 million placement will be going towards our iron and steel. Just $2.5 million, all required here. We've already put a patent application in late '21 for this application. We've already modified our electric version of this, which we already built in, in Bacchus Marsh, in Victoria, fully electrified, and now installed solar panels, so fully renewably powered calciner or kiln there. We modified that quarter 1 this year to be able to handle hydrogen, to have hydrogen in the center of the tube, heated now with renewable power. And we've already run multiple different ores, iron ores through the tube. Iron ore fines dropped down the tube. Iron ore finds, there's millions of tonnes of that produced a year that isn't pelletized or sold offshore. It's currently sitting around as waste. That's our target feedstock. And so the iron ore fines introduced the top, the hydrogen in the middle, renewably heated on the outside. And we've already, as we did in our annual results presentation, announced that we had excellent metalization or conversion of iron ore to iron. For hematite, 96%, I think, of Australia's iron ore exports [ and EBITDA ]. And so we had excellent conversion of iron ore to iron. We had some good results with another type of iron ore called magnetite. And we want to improve the performance of magnetite. But -- and also, we want to improve the way back then now our electric calciner works to had multiple different feedstocks and start to look at the iron we're producing. And what form of that iron is then best sold to potential overseas customers? Is it a pelletized or preceded form or passivated form? We want to do all of those trials. And so that's going to cost us a little bit of money. We're getting external expertise in. We're having a look at several off-the-shelf technologies to help us with that. And also what we want to do is think about what this thing looks like at 30,000 tonnes a year. Our electric calciner is about 2,000 tonnes. We need to go a bit bigger. 30,000 tonnes a year is still only one of these. We've already built our kilns at that scale, but this one will be specifically for making a greener iron using hydrogen. So about $2.5 million going to this, as I say, further to run those modifications, run those extra trials and conduct that full front-end engineering design study for a 30,000 tonne per annum plant. So very exciting potential opportunity here with iron and steel. And just a last comment before I go into details, I guess, of the share purchase plan that's coming up. With cement and lime, we're one of -- maybe I can count on 2 hands, the number of technologies that are ever going to address the CO2 emissions from cement and lime. And now similarly with iron steel, we're one of maybe up to 10 technologies that can possibly address decarbonization of iron and steel. So those 2 industries combined, 15% of global CO2, both of those industries, the largest industrial emitters and our 1 core technology has the potential to address both. So very exciting opportunities that we want to develop as quickly as possible. Just in terms of the share purchase plan, we are looking at about $20 million in the share purchase plan to allow, I think, over 6,600 shareholders we have now to partake in assisting to capitalize the company. It's discrete where will we spend that money. Obviously, we think the best investment for any extra we get the share purchase plan is to continue to accelerate the development and the deployment of the technology. In this case, we're going to be looking at alternative fuels development and electrification development. Alternative fuel is becoming increasingly of interest to industry. If you have a look at natural gas prices, certainly, that's a big driver of any kiln that's flexible enough to have a look at alternative energy sources. We are looking at alternative energy sources in the Leilac-2 project. We're looking at burning waste fuels there. But we want to expand that capability to look at biomass, other forms of creating energy such as gasification of waste. And so we want to accelerate that as quickly as possible as well. And the last piece is electrification. Currently, our electrification is you've got sort of elements sitting around the tube, like a toaster, but there are some other interesting electrification options for us, such as electrification of the tube itself, induction heating, even plasma might be an option for us. And so we want to make sure that we're having electrification across as many options as possible. So this is discretionary spend over and above according to what we get in the share purchase plan, but that's where we're going to be putting the capital, should we achieve some decent interest in the share purchase plan. Just on the share purchase plan. It's $20 million, as I said before. You -- the record date is obviously the data of the placement. We're going to open that the 26th of October. And so for those shareholders who were there on the books at the record date, you will be receiving information. It will be on our website as well and even, of course, on our register. If you want to go into the share register and Boardroom, you can pick up the documentation there if you're interested in taking the share purchase plan. We'll leave that share purchase plan open for a couple of weeks. So just on Thursday, 10th of November, we'll be closing that and obviously announcing the results and issuing the new shares to those who wish to participate. So I guess -- so I'm happy to conclude here and obviously, happy to take questions as well.

Perfect. First question. What constraints does the technical and economic feasibility of carbon storage plays on Calix's growth potential?

Yes. So just in terms of the cement and lime piece only, carbon -- when I talk about our technology, we're talking about lowering the cost as much as possible of separating that and compressing it. But obviously, the question always is what do you do with it? Those first few plants, maybe they could sell it. There's industrial gas market for CO2. But ultimately, there's too much produced by the cement and lime industry to utilize. The International Energy Agency estimates that only between 13% and 15% of the emissions from the cement and lime industry could ever be utilized. And so the transportation and sequestration, and by sequestration, I mean injection underground, is the only option for the cement and lime history because of the amount of CO2 they produce. In Europe, Port of Rotterdam is part of our project consortium in the Leilac-2 project. They're developing the largest CO2 transportation storage hub in Europe. And so obviously, we're starting to tie through to what happens to the CO2. But the question is absolutely right. We need that transport and storage in structure in place for our customers, the HeidelbergCement of the world to deal with the CO2. What's interesting is, of course, though, over the next 10 years, the European Union will be subsidizing the capital costs and the transportation storage costs to the tune of 60%. So that's to encourage these projects to move ahead and to encourage the infrastructure investment required to get these projects up and running. So Europe is on its way, and it has appropriate incentive schemes to drive the uptake of the technology. Interestingly enough, in the United States, with the recent Inflation Reduction Act, that increased what's called the tax credit system, the 45Q tax credit system, that pays a tax credit for CO2 that's been captured from industrial sources and sequestered. And what's really interesting there is the U.S. already has CO2 transportation storage infrastructure. So that particular infrastructure there is what's going to be utilized as we develop these projects to try and transport and store CO2. Typical costs are less than USD 20 a tonne to transport and store. And typical tax credits are between USD 55 and USD 85 per tonne in the central level. And so with our cost of separation, we're starting to see the technology, including the downstream transport and store the CO2 in the economic frame for development projects. So yes, an important part of the equation with respect to deployment of technology of CO2, but a lot of activity happening in this space given the incentive spend in both of those areas. I will just touch on iron and steel before I go finish up on this question, Simon. We're not relied on any CO2 infrastructure for iron and steel. What we need is renewable energy, what we need is green hydrogen, and what we need is iron ore fines. That's all we need. Both all implacable supply, hopefully, in regions such as the Pilbara, but no CO2 infrastructure needed to decarbonize in the industry for our technology there. So yes, hopefully, that answers the question, Simon.

Perfect. Next question. Is there a commitment from Heidelberg to roll out tech to all of their cement plants?

No. Obviously, what HeidelbergCement are doing is putting their eggs in several baskets. They've invested in Amy. So they've got a big project they're working on called the Norcem project. And that's a 400,000 tonne per annum CO2 separation facility in Norway. The challenge with that project is cost. I think it's up over EUR 370 million to implement that. At similar scale, even if we had no scaling advantages from our technology, we're about 1/3 of that cost in terms of capital cost. But we have to prove that we can get to that sort of operational cost level with our Leilac-2 plant. Again, as I mentioned before, that's about proving up the process and heat integration. And so that even [indiscernible] are proven at that scale on a cement plant. Yes. Heidelberg made a commitment to have 10 million tonnes of CO2 capture capability by 2030. And so to reach that, they are making bets across several different technologies. Our [indiscernible] another technology called Oxyfuel. So obviously, onus is on us to prove that our technology is the best and the lowest cost. And so that's our mission. And so Leilac-2 is a very important project for us. I'm sure if we can achieve what we want to achieve in Leilac-2, we should feature very strongly in HeidelbergCement's rollout from here on.

Next question. Could you provide some insight into the input cost of the spodumene fines, i.e., is it at Pilbara's cost at a grade discounts prevailing [indiscernible] or something else?

Yes, they will be reveal more, I guess, once we complete the feasibility. We are in discussion with [ Boral ] the value of the lithium in those funds, but also those fines are currently very difficult to sell as a final product. There will be some link to -- you said spodumene concentrate 6% benchmark price. But of course, there is a discount because the fines have a lot less utility and a lot lower purity than that. So as we finalize the agreements with Pilbara, we'll start to talk about what that is input cost will be for the plant. We do expect that the plant, at current lithium salt prices, though, to be quite interesting in terms of gross margin. And so as we finalize the feasibility study, we'll talk about that, okay? So we'll be able to talk more as we finalize that feasibility study.

Perfect. Next question from Seth Hoskin at Canaccord. The royalty agreement capital is trade to confidence that your tech will be the lowest cost over the long term with the capture sector and relevant technologies, largely, very early in nature. Could you detail the key factor or factors in your process that gives you the confidence that this will remain the case?

Yes. So in this case, we have, I guess, what I call physics on our side. Our particular process is not utilizing any parasitic energy load to drive it. Every other technology does. What I mean by that is if you're building a chemical plant at the end of a cement plant to process its flue gases, it takes power to run that. Whereas our technology, the better we can integrate the process in heat streams, the lower we can get the cost. The ultimate aim is 0 in terms of OpEx. That's the ultimate aim. If we can perfectly integrate process and heat, we get to 0. We're not there yet. We estimate that Leilac-2 will be at a 12% inefficiency because we're moving hot streams about between the plants. But with physics on our side and good engineering, we can continue to drive down that particular energy penalty associated with our technology. And theoretically, let me say it that way, it will reach 0. So really, that's the key reason we have confidence that we can continue to drive our cost down and continue to maximize the revenue potential of the license agreement with the structure that we've put in place.

Perfect. And just last question from Seth. Finally, on the pipeline, continues to grow strongly. Are you able to outline what the pipeline is in terms of number of Leilac 2s versus Leilac 3s? Or are you able to provide an estimate of the level of CO2 emissions currently in the pipeline?