Calix Limited (CXL) Earnings Call Transcript & Summary

I believe we've now started. Welcome to Calix Limited's Investor Briefing. Chief Executive Officer and Managing Director, Phil Hodgson, will provide an overview of Calix's Zero Emissions Steel TechnologY application otherwise known as ZESTY. I'm Kylie Ramsden, Managing Partner of GRACosway, and I'll be hosting today's briefing. Following Phil's presentation, we'll open for questions. Darren Charles, Chief Financial Officer; and General Manager, Sustainable Processing, Chris Ormston will join Phil on responding to questions. Over to you, Phil.

Excellent. Thanks very much, Kylie, and thanks all for joining us today. This is the first in the series of webinars we'll be doing, where we'll do, if you like, a bit of a deep dive into some of the applications that we're developing our core technology into, obviously, the lime and cement piece is one that's probably fairly well known. And indeed, even just this morning, you may note that we've put up an announcement about a joint venture we've put together with Heidelberg Materials covering the LEILAC-2 demonstration facility that we're progressing at that new site at Ennigerloh, hard to pronounce, but that's what it's called Ennigerloh in Germany. So it's really great to get that formalized with Heidelberg Materials and as per the announcement, starting to discuss what the LEILAC-3 plant would look like there as well. In parallel, we're developing the LEILAC-2 facility. So we may do the next deep dive on LEILAC, we'll see how we go. But we wanted to do ZESTY today, our zero-emission steel technology. So if we sort of start to move through the pack down, we'll go to the next slide, which is our important disclaimer. I'm sure this pack will be put up on the web, and you'll all be able to read through our disclaimer. So we won't try and attempt to read through it today, though. If we have a look through what we want to cover today, for those of you who've only got a few minutes, I'm going to hit some key highlights first. And in those key highlights, I really want to bring to the fore what we know about ZESTY today in terms of the technology where it sits within the industry and what our commercialization pathway is. I'll then move through more into a general introduction to Calix just to make sure those of you who aren't familiar with this or the technology are brought up to speed. I'll talk about the technology status with ZESTY, the results of the most recent and continuing runs that we're doing on Australian iron ores. I'll talk about the industry opportunity more broadly. And this is an area that we haven't covered more fully previously. And an area we've done a lot of work to understand the value proposition and that's really shaping our commercialization strategy. And that's the other last piece that I'll be covering today. And obviously, as Kylie said, we'll be opening up for Q&A towards the end of the talk. I tend to try and get this done in about 30 minutes or just over. So if I can get that done, we'll have plenty of time for Q&A at the end. Okay, let's move into it. So key highlights, just for those of you who've only got a very short space of time. First of all, a pretty obvious statement, iron and steel are pretty essential, I think, in most forward projections, iron and steel are going to be -- continue to be required by society today. They're responsible for over 8% of global CO2 emissions. And all of those emissions -- well, most of those missions are coming from making of iron, about 80% comes from making iron in the production. And so this is a big issue, especially countries representing 90% of global gross domestic product. They are under net 0 commitments and yet you have a product here called iron and steel that is contributing an enormous amount, similar to cement and lime. So both together are about 16% of global CO2. So very hard-to-abate industry. We put together ZESTY, if you recall, back in about 2021, we had -- our chief scientist came up with a great idea to look at the core technology to apply to iron and steel by using hydrogen. And hydrogen, and I'll talk about our reactor shortly, but it's introduced into our reactor. The same reactor that we used for cement and lime, just repurposed for iron and steel. And we're targeting lowest hydrogen use. Hydrogen is a great product for removing the oxygen off iron ore to make iron, but hydrogen is really expensive, as most people know. And what we have here with ZESTY is a way to minimize use of green hydrogen and green iron making. That is the way to get the cost down. That's the easiest way to get the cost down in green iron making. And so where we saw big potential for ZESTY is basically making sure it was lowest hydrogen use in green iron making. The other thing, of course, that we're very interested with ZESTY is the fact we can process low-grade ores and upgrade those ores potentially as part of the process. And that particular area is importance to Australia as I'll cover off in my industry section because 96% or so of the ores we export currently are unsuitable for electric arc furnaces. And that is an existential threat for this country, where I think 44% of our resource earnings are earned from iron ore exports, just over 30% of our total expert earnings are iron exports, iron ore exports. And so if there's an exponential threat, there as the world decarbonizes and moves to electric arc furnace. So we need to do something about that here. Now, and also quick takeaway. 2021, we filed that patent. We upgraded our facility at Bacchus Marsh to be able to run hydrogen and do the first bits of testing within the space of a few months and did those first quick tests to see whether the technology work. We then modified the reactor further to give you more flexibility and it's since carried out, as I mentioned, probably over 130, 140 different test runs on 9 different ores. And so the ability to quickly pivot and convert the reactor to hydrogen is a key advantage of the technology full stop. But we've been going since 2021. And some of the other technologies that I'll talk about today have been going for decades. So it really does say something about the flexibility and the potential of our technology, not just in green steel, cement lime, but other applications we're developing as well. So if we move on, Darren, what I'll cover today are 3 sort of specific areas. Certainly, industry, I mentioned before. I want to really paint a picture of the industry as it stands and how ZESTY fits into that as we develop it. In terms of technology, I mentioned before, the pilot that we got going at Bacchus Marsh in a very short space of time, and has now rigorously tested 9 different ores from the Pilbara, other ores are coming in from overseas. And we -- that pilot we run on renewable energy. So it is connected through to 1/3 of a megawatt of solar panels sitting on the warehouse roof down at Bacchus Marsh in Victoria, so we're already powering our pilot with renewable electrons. As I mentioned before, we're targeting minimal hydrogen use. Our technology is, I'll describe shortly is compatible with fines. In fact, it's got to be fine material. And that's good in this case because there's millions of tonnes of super fine material produced in Australia as we mine iron ore. And a lot of those fines don't get sold overseas. A lot of them are considered waste material. And so there's a great entree for the technology into the iron ore industry here to convert waste to a better product as in a green iron. We don't need to pelletize. That's where you collect the smaller particles and put them together into a pellet to go into a standard furnace, because the standard furnace will blow small material out of it. We don't need to pelletize that removes a processing step. It removes capital, it removes energy from converting into a green iron. And so that's an advantage of the technology. We've done some bracketing trials. So once you made the green iron, what do you do, you make these brackets of iron to be sold overseas. And that's in and of itself a reasonably technical process, which we're already getting some very encouraging results. And obviously, the patent protection around the technology is critical for us as well. As I mentioned, a patent filed in 2021. And who's to say that certainly, we've continued to develop the technology and further protections may be required with all of the stuff that we've learned since, which is quite extensive. And lastly, I'll cover off today the commercial go-to-market strategy with this particular technology. For those of you familiar with our LEILAC business, it looks pretty familiar. We're going capital light. We want to have a licensing and royalty type business model. We've got potentially attractive economics even without carbon pricing for this particular technology. And so commercial traction, we're hopeful can be quite quick. We can have multiple decarbonization pathways. So iron and steel was made, as I mentioned before, there's electric arc, I mentioned, but there's also a standard blast furnace or basic oxygen furnace -- blast furnace basic oxygen furnace steelmaking. I'll cover what ZESTY's value proposition is for both of those steelmaking techniques. And as I mentioned before, we had the LEILAC model that we spun out. We spun out pilot LEILAC in 2021, which is the lime and cement piece. We're getting impact fund investment into that particular piece to accelerate its commercialization and deployment. And so that's a potential pathway for ZESTY as well. And I'll cover off why we think that's probably a high potential and good idea to do. And lastly, we've got some great collaborations going with iron ore producers steel makers via the heavy industry, Low Emissions Transition Cooperative Research Center. And I'll touch briefly on that as I go through the commercial pathway as well as to who we're working with. So let's move through into a bit of a -- more of a deep dive into who we are as Calix, the technology, and then I'll cover industry and finally, commercialization. So if we move through to next slide, Darren, for those who aren't aware of Calix. We've been around since 2005, we listed the company in 2018. We've now got over 120 employees, and we've invested a lot of money today to develop the technology to where it is. We're active now in 7 countries across 5 continents. So we have teams in Asia Pac, teams in Europe, and teams now building in the States to really take advantage of the decarbonization efforts that are happening around the world and to have local teams that are managing projects. I've talked at some stages earlier about the pipeline of projects we've got going through the LEILAC lime and cement piece. I'm going to be talking about the pipelines that are starting to develop in iron and steel and alumina and in lithium. So several different applications of the technology being developed and interest and pipeline starting to build across all of those as well. If we move through down to the next slide, just in terms of the core technology. For those who aren't familiar, again, I'll very briefly describe, it's basically a new type of kiln or furnace, a new way to heat stuff up, if you will. In a traditional kiln or furnace, you put what you heat and how you're heating the 1 vessel. So the fuel and the rocks and you'll like to match. Obviously, it's a bit more sophisticated than that over the years, but that's essentially the core principle. What we do is we separate how you heat from what you heat. We do that with a rather large steel tube. I'm here in the States at the moment, and my traveling little model of our technology is with me here, my [indiscernible]. So we have a rather large steel tube. We heat that tube from the outside. We hit that with fossil fuels. We can heat it with waste. We can heat with biomass or we can heat it with renewable electrons. We're energy-agnostic. And so that's the first sort of key advantage. It's a great kiln because it's energy-agnostic, and as industry electrifies, it's going to be a great way for industry transition to low carbon intensity. What we heat goes down the middle of the tube, it needs to be a small particle size, anything smaller than 1/3 of the millimeter is fine. And so imagine holding a lamp of flare on your hand and imagine then dropping that to the floor and watching the flower float down, that's all we're doing down actually. We're dropping what we want to heat down the tube. We heat the tube to over 1,000 degrees centigrade. And so the red hot walls of the tube basically radiate heat into the powder, and that's what heats the little particles up, that radiative heat. And so why do it that way? Well, the first reason is the very first business at the top of the slide there called LEILAC, which is carbon capture. LEILAC is involved with looking at unavoidable CO2 emissions coming from limestone. There's a lumber limestone. Nearly half the weight of that is CO2 trapped in that rock. And when the cement line industries heat that up, they release that CO2. Cement lime is responsible for about 8% of global CO2 and over half of that is coming from the rock. So it's unavoidable. So even as the cement lime industry decarbonize and electrify kilns, hopefully with ours, they've still got over half of their emissions coming from this. Of course, in our kiln, as the ground limestone is dropped down, the CO2 has got nowhere to go as it comes out of those little particles, it can't escape to the furnace. It comes at the top as a pretty pure stream, and so what it represents and what the LEILAC business is doing is commercializing a new type of kiln that directly separates the CO2 that comes from the rock. And that's a piece of business, which is moving ahead very nicely for us. The second business down here, which is called sustainable process. Again, this is where ZESTY sits. It's the ability to electrify this with renewable energy, and particularly with ZESTY, the fact that we have a tube means we can have an isolated gas in there that doesn't get contaminated and it's not lost and that's part of the reason why when you introduce hydrogen in here, it's a very efficient use of hydrogen to reduce iron ore to iron. And I'll talk about ZESTY in a more fully shortly. So several different applications for the technology. Magnesia is a third application where we're producing some pretty interesting stuff out of magnesia, which is used to make things like magnesium hydroxide for water treatment. And that business is actually earning us some reasonable revenues and growing revenues as well. So if we go to the next slide now, you can see sort of across our business, we've got several different lines of business that we're developing. The carbon capture piece is under LEILAC, targeting cement and lime and direct air capture. The sustainable processing piece, you can see several under there, ZESTY is what I'm focusing on today, but the Pilbara Minerals joint venture is focusing on lithium. And that particular -- we're just hopefully about to start construction at the Pilbara Minerals side in Pilgangoora. So targeting production of our commissioning in April next year. So that particular project is very exciting. We're a 45% joint owner in that. Alumina is another 1 there, and that may be worth another deep dive session at another time. And the Magnesia business, which is earning us quite nice revenues in water and some higher prospective businesses we're looking at and developing in agriculture, marine and bio. And that's where we're using magnesium oxide for some interesting bioactive properties. So we're working with quite a few different partners, as you can see there on this particular slide. The revenue model is light. We want to go license fees. We've got licenses in place already across the LEILAC business, 1 with Heidelberg Materials, one with Heirloom and more where under negotiation. And they are dollar per tonne type, not $1 necessary. I'm just saying there are a certain number of dollars per tonne in terms of the royalty value. And Heirloom is USD 3 per tonne CO2, and they're targeting over 1 billion tonnes of capture by 2035. So quite significant potential revenues and values associated with that business there. I'll talk about this -- in this meeting where we think ZESTY will be in that total addressable market. So hang around for that. We've got an idea of what royalty we think we should be able to achieve. And we're being, I think, conservative because we're sort of looking at about half the rates of the LEILAC royalties in the numbers I'm going to talk to you about. But huge businesses, obviously, those iron and steel businesses, just iron itself, a market size, probably $640 billion per annum in total revenue or value and we're looking at a percentage of that as far as royalties. Okay. Let's keep moving down and finish off. Intro to Calix. We've obviously built a few of these kilns. The one on the left is the Magnesia kiln, that's been operated since 2013. So well over 10 years of operation now, thousands of hours. We have industrial robustness proven there, very, very low maintenance. We have a great kiln full stop. The lime and cement application there is the LEILAC-1 facility in Belgium. That's the largest CO2 separation facility on a cement site outside of China. The Chinese version is an [ amen ] system, a different sort of chemical system, which is roughly sort of twice the size of LEILAC-1, but LEILAC-1 remains the largest -- one of the cement facility outside of China today. And that's today, and we commissioned that in 2019. And obviously, we're -- as I mentioned before, we're moving through to LEILAC-2. And in the announcement today with Heidelberg Materials is really important for us. The next one there along is the test facility, fully solar powered that we're testing all sorts of things on, including iron and steel. And so the iron ore results were done on that particular facility there, the blue colored column. And across the -- to the right, you can see there a rendering of what the next one we're going to be building for ZESTY would look like, 30,000 tonnes per annum. FEED study has been complete, the front-end engineering design, and so working with several partners there on that FEED study. And that particular 1 there, again, will be the subject of a bit more detail as I move through the presentation. So Darren, if we could move down a bit further. Let's now look at the technology and where it's at in terms of its status. So there's a diagram on this slide of the ZESTY reactor itself. And if you have a look at that, and you can imagine those iron ore fines coming into the top of the reactor, remember my little [ towel roll ], iron ore fines in the top, and in the bottom we put hydrogen. That hydrogen loves the oxygen on iron ore. It will rip that oxygen off the iron ore and make iron. And the hydrogen itself, when it does that, converts to steam. So hydrogen plus oxygen makes to steam. And so at the top of our reactor, that sort of brown tube coming at the top comes a mixture of any unreacted hydrogen and steam. And so all we've got to do is condense that steam. So we turn it back into water. It can go back and make more hydrogen. And any unreacted hydrogen is simply recycled back into the ZESTY reactor. This is the way we achieve minimum hydrogen use. As I mentioned before, hydrogen is going to be the most expensive part of making a green iron ore steel using hydrogen direct reduction. And when I cover off the competitive technologies, none of them are going to be able to recycle hydrogen as easily and as efficiently as we are. And so that already sets ZESTY up to be a pretty interesting contender, if you like, for the best technology with respect to producing hydrogen direct reduced iron. The iron itself when it comes out the bottom of the reactor can move into several different steelmaking processes. The first area that we're going to be looking at is making a bracketed product to go into a blast furnace or basic oxygen furnace. And I'll talk about that a bit further down when I talk about industry. But there is a hell of blast furnace in basis of oxygen but it's still making steal in the world, still well over 70%, some of the fleet is still quite young. So some of that fleet, especially in Asia Pac is sort of an average age of 15 years old. So those blast furnaces, which have had billions invested in them, have decades to go still. And the other area that we want to look at is to see if we can take the iron that we make and maybe we melt it and seeing if we can, what's called slag and remove some of the impurities with slag to make a more purified green iron for electric arc, and that particular process there is one that's been developed by several companies. You would have seen a recent announcement by BHP and Rio and BlueScope to start to put a melter slager facility in -- at Port Kembla. And so there's several initiatives that will tack on very nicely to our technology to be able to make a purified green iron for electric arc steelmaking. I think I've covered before some of the other advantages of the tech, we can -- we've certainly done all of our testing on what term lower grade ores or Pilbara ores. We don't have to pelletize, we know how to scale this business -- sorry, scale this technology. We've already built reactors, the size that we need to build. So the LEILAC reactor, the Bacchus Marsh, sort of first reactor we build for magnetite are all similar scale to what we'll be building for ZESTY, and we don't want to get into things like fluidized beds. I'll talk about that a bit further when I talk about competitive technologies. But some of the early hot briquetted iron plants that were built in Australia, so not a happy history there, and fluidized beds are not easy to operate and so moving away from that to be able to use fines and produce an iron -- and hot briquetted iron or green iron is a great advantage of this technology. Okay, let's keep moving down. So let's have a look at the points of difference with some of the key technologies. And if you have a look down the left-hand side, we've tried to group them into technology groups. There's straight out carbon capture. So trying to capture the carbon that comes out of a blast furnace. There's this technology called smelting reduction, where you're trying to reduce the iron ore to iron at the same time as smelt and slag it. And there's technologies around that are looking at that, that have been around for a little while. Fluidized beds, I mentioned before, lots of effort has gone into fluidized beds. People don't like pelletizing because it takes a lot of energy and a lot of capital to build a pellet plant. So if you can process foreign particles, that's sort of the holy grail and so there have been sort of efforts and are continuing efforts on fluidized bed technologies. Simple shaft furnace with reducing gas, quite a prevalent project that people may have heard of, is the H2 Green Steel project in Sweden. That's basically using a Midrex technology is called, which is a shaft furnace. They need pellets and they need to be able to distribute that gas stream well and keep that hot in the shaft furnace. So a few challenges there for those guys. Flash iron making, which is still lab scale and hasn't really progressed out of the University of Utah. Microwave reduction, highly topical. I think everyone saw the announcement recently about BioIron and Rio Tinto's technology there. It is currently lab scale or obviously pretty bullish about trying to scale that up and obviously trying to get a competitive edge if they can get that technology to work. But it will still require -- what we term CCS or proven carbon reduction, it will produce just as much CO2 as coal, but the fact that it's bioderived carbon that they're using. It means they're going to have to have some sort of proof point that, that biomaterial has been replaced with growing biomass elsewhere. So not straightforward and certainly not straightforward, it comes to microwave and scaling up microwave. The last one there is electrolysis. Several different companies developing electrolysis technologies such as Electra and Boston Metals. Electrolysis involves having a dissolved or molten iron and basically having electrodes that electrically pull the iron to that electrode. And then that electrode is removed from the electrolyte and cleaned of the pure iron and then put back in and off your go again, traditionally difficult to scale those types of electrolysis technologies. And so that one there, again, Boston Metals around since 2012, at least, still in the lab. And so electrolysis is one of those areas that if you could get it right and if you could get it working, it looks quite prospective, but scale is going to be an issue. So ZESTY stacks up pretty well against all of those different technologies. We sort of tick most of the boxes that need to be ticked to have a fairly compelling technology. So we're pretty bullish about them. Let's keep moving. Just in terms of results, again, we've been able to test, as I mentioned, over 30 -- 130 plus test runs, 9 different grades of iron ore, 6 different iron ore providers, gave us those iron ores. We've hit really well into the target range for what's called metalization, which is conversion of iron ore to iron. And some of those results were well into the target range for electric arc in terms of metallization. So well above the 90% -- sort of 5% mark. So this is only an 18-meter tube that we have at Bacchus Marsh, and the full ZESTY demo that we've now designed will have over a 30-meter tube. And so there's lots of levers we can pull to get all of these metalization results even higher. And in the bottom left of this slide, you'll see some of the briquettes were produced. These are like little hockey pellets. These are really important because iron is really reactive. It will react quickly with oxygen to form iron oxide or rust. And so you need to be able to briquette these the fines that come out the bottom of our reactor into a form that is easily exportable. And within the first few trials, we've been able to produce these hockey pucks, our own briquettes that are very close to the required density to allow safe shipping. And so just with a little bit of fine-tuning, we're very confident that we'll be able to do H2 DRI briquetted iron out of our facilities, which is an important part of connecting through to end market, obviously. So proven a pilot scale is what we're saying, certainly ticked what we might term tech readiness Level 5, which is an excellent result in such a short period of time. We keep moving, Darren. The last piece of work that I'll cover off is the work we did to put the front-end engineering design study together for ZESTY, the ZESTY demonstration facility, which we did with some funding from ARENA. And what we found is that we could produce green, hot briquetted iron at cost close to the range of conventional hot briquetted iron, and so we're starting to get towards -- our techno-economics were starting to look as if we could produce down in the low 400s, depending upon the key input being renewable energy electron price. We looked at electron prices from solar and wind globally averaged. So levelized cost of electricity from those sorts of sources. And especially as we scale, we're going to be able to take these costs down even more. And so what excites us here is the ability to produce a hot briquetted iron at close to current economic prices. And so that's before taking into account the cost of carbon. And so the technology, if we can scale successfully, could mean that we've got a facility which is this great hot briquetted iron producer, let alone something that would produce a green iron and operate on renewable electricity and produce obviously low carbon. So that was a profound and exciting part of the work that we've done with respect to the ZESTY pilot testing and the FEED studies. So lots of figures there for those that a bit more astute with how much energy it costs to produce a ton of HBI, but we're down in the range there that is highly efficient in terms of megawatt hours per tonne of iron produced. So we've got a very efficient process, it looks as if it could be quite economic without the cost of carbon. So that was a huge and important output from our FEED study. We keep moving down. So what do we want to build? The demonstration plant, 30,000 tonnes, why? We already have discussions ongoing with some of the companies provide us iron ore that they want to do runs through this plant to produce several thousand tonnes of briquetted iron to enable their customers to properly test it in blast furnace basic oxygen furnace steelmaking. So we need to produce something at this scale, no smaller. But this scale is pretty good for us because it's pretty much the same scale of LEILAC-1 facility, sort of a 30-meter tube, maybe up to 1.8 meters in diameter, single tube, renewably powered and obviously capable possibly of even making its own hydrogen. The ARENA help cover the cost of that FEED study and so that particular study cost is just on AUD 2 million, fully completed, and that was a really important benchmark for us because we now have subject to site selection. We're getting down to just a few sites that we are going to look at for this. Subject to site selection, a facility that is almost a front final investment decision. So once the site selection has been done, there will be some site-specific economics put together. And basically, a final investment decision can be made from there. Keep moving, Darren. So next steps with this commercial demonstration facility. Once we pass that final investment decision, we should be able to get the detailed engineering done and then the construction within 30 months from FID. So a commission testing phase of about 4 months from then, and then an operational improving phase. The business model for this particular facility will be to charge just OpEx, just to cover the cost of operating the plant for those demonstration runs that I mentioned before, it produced demonstration runs of hot briquetted iron for iron ore clients. And the other thing that's important here is, as per our experience with LEILAC, we plan to build a commercial pipeline at the same time as we construct and operate this plant, and so we weren't just be sitting there waiting. The commercial pipeline built very nicely in LEILAC over the course of the LEILAC-1 and ultimately LEILAC-2 processes. And so I'll cover off where they've got to, where LEILAC has got to, and that's obviously something we're trying to emulate here with ZESTY as well. Let's keep going, Darren. The industry opportunity. So I think I've covered before how important iron ore is to Australia. We need to have multiple decarbonization pathways. What I mean by that is, we need to be able to make sure that our iron ore in Australia can supply where the current market in terms of steelmaking and where the market is going. So when I talk about that, I'll talk about the classic blast furnace sort of steelmaking and electric arc furnace steelmaking. So how does ZESTY sort of scale across those 2. I'll talk about that shortly. If you just move down, Darren, to the next slide. There's lots of drivers accelerating iron and steel decarbonization. Certainly, I covered off before how many direct emissions are occurring there. And the legislative environment is certainly in sectors such as the EU are providing quite some in Sydney, both penalties as well as positive incentives for the industry duty carbonized. And here in the States, certainly positive incentives for the industry carbonates at the 45Q tax credit system. And so there's a lot of incentives around industry. There's a lot of incentives coming through from stakeholders to owners of steelmakers and iron ore producers to decarbonize their Scope 1, 2 and 3 emissions. And so those pressures are manifesting at shareholder meetings and other stakeholder meetings. And so you've seen these companies really start to move in terms of their public announcements about targets for decarbonization, whereas just 2 or 3 years ago, certainly, that was the exception rather than the rule. Keep moving, Darren. So let's pass forward the International Energy Agency's sustainable development scenario and what iron and steel are doing moving ahead to 2050 and beyond. Steel production doesn't change a whole lot. If you look at the graph on the left-hand side of this slide, sort of getting up to 2 billion tonnes a year, and so it's looking to level out a little bit. On the next set of bar charts, as you move into the middle there, you can see there that scrap iron recycling and scrap steel recycling becomes a larger part of the steel mix, so moving close to 50%. You must have new iron coming into the equation, though, because what scrap does is tend to concentrate up contaminants in the steel, which can weaken it. So you'll always need a little bit -- you always need some new iron coming into the system. And as it looks there from [ 2070 ] or so, it's roughly 50-50. And the other thing there, I talked a bit about electric arc before. You can see their electric arc occupying about 28% of the current steelmaking fleet and moving up to 74% by 2070. But the graph to the right is probably the most interesting, and this is where the IEA has looked at the steel-making fleet over time. And you can see blast furnace, which is commercial BF, that dark blue bar, constituting the majority of new iron production each year. But that declines, that starts to decline as you move forward through the decades, all the way up to 2070 in this case. You can see there emerging is that sort of brown gray bar at the top, which is 100% hydrogen-direct reduction. You can see the other big boxes starting to emerge like this pink box, which is basically sort of a selective reduction. And so that smelting reduction with carbon capture is predicted by the International Energy Agency to be less equally as big as hydrogen-direct reduction. Interesting enough, we think that if you can get hydrogen-direct reduction cheap enough, that pink bar becomes total addressable market for hydrogen-direct reduction. Certainly, for ZESTY, if we can get achieve the economics I outlined before. So almost the total iron-making profile by 2070 is total addressable market for ZESTY. And so if you think about that, that's 4,300 ZESTY DRI modules, each of 300,000 tonnes per annum. And I think we did calculations of how many you have to produce a week or build a week to do that, and it's probably about 1 a day, I think, between now and 2050, so enormous addressable market. If we move to the next slide, we'll look at the implications of that. So if you have a look at today's market, and here's where we're having a stab at what royalties we might be able to achieve. If we just look at 2% of HBI value as a royalty, so about USD 7.50 per tonne, so this is about half the royalty that we've achieved in LEILAC, okay? So we're being conservative. But let's just do the numbers on 2% of HBI value. The total addressable marketing substituting iron ore partial substitution into a blast furnace in terms of blast furnace basic oxygen furnace steelmaking, we're looking at $2.3 billion TAM today. And of course, as blast furnaces age and were removed from the fleet, you get down to $1.2 billion in 2050. The electric arc piece, and this is where we're melting and slagging and producing more highly purified green iron for electric arc steelmaking. That's only about $1.2 billion addressable market today, and that will grow to $4.7 billion. So the critical thing here is -- well two things: firstly, the size of the market and the size of the opportunity for the technology at a modest royalty rate, which is the business model we've put into LEILAC; and second thing is ZESTY is targeting both. We're targeting both -- the existing blast furnace basic oxygen furnace market with some substitution of H2 DRI into a standard blast furnace feed, which helps them reduce their CO2 footprint, and secondly, the electric arc market, as I've said before. So a substantial opportunity. Let's keep moving, Darren. So how are we going to do it? What's the commercialization strategy? First of all, who are we working with. So we've been in this thing called the HILTCRC for over 3 years now. It's got some pretty important core, key and affiliate partners across various industries, steel producers, iron ore producers, alumina, cement and lime. We've got a multiyear, multi-project -- the HILT has a multiproject program backed with $200 million, some from the Australian government, some from the industry participants. And so there are multiple programs that are happening under this. And our ore testing was 1 of the -- and so we're obviously looking at a couple of other areas as well, cement and lime as you well know and alumina. But this talk is about iron ore, and iron ore is one of those areas that we've done a lot of work on with the HILTCRC and our partners in it. Let's keep moving. So in terms of -- what that represents in terms of a commercialization pipeline, who are we talking to? We can't say we're under confidentiality. We'll just put some numbers there. So we're talking to numerous players in the iron and steel space. And we've got a pipeline that we'll also be talking about and carrying forward as the company moves forward, talking about lithium, aluminum and other applications as well. So it's not just 1 or 2 people who we're working with and talking to about developing the technology. We're bound under confidentiality not to be able to talk about names, but we're just adding up the numbers of discussions happening in the pipeline. Some of these are material transfer arrangements. Some of them are testing collaborations, all of them indicate interest in the technology down those different applications. And so you can see the iron and steel piece is pretty healthy. Let's keep moving, Darren. I mentioned before, a license and royalty business model. We've looked at other business models, they're heavy on the balance sheet. The licensing model is what we've successfully already done with LEILAC and it's the model that we're going to be moving forward with ZESTY moving in down through. If we do have a look at LEILAC and how its pipeline is built, '21 to '23, you can see significant inbound has continued to build the interest in the LEILAC pipeline. So this is the lime and cement opportunity. You can see there the people we're working with. And the plan is to emulate this particular business model with ZESTY. We've also, as we mentioned before, spun out LEILAC -- we've partially spun it out. We had an entity called carbon-direct impact fund, come in for 7% of LEILAC in 2021, valuing LEILAC EUR 215 million post-money, plus 30% of all LEILAC royalties are going to be paid to Calix from that company regardless of their equity. And so that particular spinout model is highly attractive and highly value accretive. We've continued to derisk LEILAC considerably since then. But that's the type of business model that we're looking at for ZESTY. Let's keep moving, Darren. What's interesting about the private space is how much these companies have been sort of valued by the capital raises that they've undertaken. Electra, Boston Metals, H2 Green Steel have been fairly public and it's a bit hard to understand exactly what the EV or enterprise value was, but you can sort of put a bubble there based upon roughly 25% to 40% dilution as they bring in new equity in their Series A, B and C capital raises. So you can see here some pretty substantial valuations. And what's interesting is along the bottom, that's the technology readiness level of these particular companies. As I mentioned, LEILAC is about -- sorry, ZESTY is about TRL5. And so with respect to ZESTY, if the capital markets are much the same as they were when these raises were done and value is sort of looked at in the same way, ZESTY could be worth a reasonable amount of money. And so that's something that we're testing. That's something we're looking at to see if that's the best way to bring some capital into ZESTY to enable it to pursue the construction of that demonstration facility. Thanks, Darren. Keep moving. So I'll wrap up now. So we've gone about 10 over what my intention, but hopefully, it's been educational, and hopefully you pick out some of the excitement that we certainly feel in ZESTY. There's a huge addressable market at conservative royalties for this technology. It's obviously one of the world's largest industrial decarbonization opportunities. So in and of itself, this is just ZESTY. This isn't LEILAC plus ZESTY. This isn't LEILAC plus ZESTY plus Aluminas. This is just ZESTY. So enormous addressable market. We know that the demand is growing there. The policies are driving both incentive and penalties with respect to carbon emissions. And that will continue. I know that there's malaise in the market at the moment. I know people are concerned about interest rates. That's having an impact on all sorts of stuff like ESG funds and the way ESG stocks are perceived. But all that is doing is pushing back the inevitable. This dam will bust again at some point in time. And these companies will have to move and time is running out. The royalty -- business model is capital-light, royalty-driven as per LEILAC. So we're very confident that in that business model and executing that business model. We've done it successfully, as I said before, with LEILAC and we achieved not only good ways to raise capital into a different part of the company into a sub, but that also assists with giving look-through value on that technology. Why are we so excited? We've got several advantages over existing hydro reduction technologies and green island steel technologies more broadly. We're at sort of a tech readiness level that is not in any way further behind or behind a lot of these other technologies being developed in the space of a few short years since 2021, we've got a technology, a tech readiness level, which is pretty close to and/or equivalent to most of these other technologies that are being developed today. So we've moved remarkably quickly. And that's why, I guess, we want to keep moving quickly. That's why we're pretty excited about this opportunity. So look, I might pause there, and again, apologies for going a little over, and let's see if we can have some good 10, 11 minutes of questions. Kylie, so I'll hand back to you, and if you want to direct some questions, I'll try to answer.

Great. Thanks very much, Phil. We'd now like to open the Q&A session. We'd like to invite you to ask -- submit your questions via the Q&A function, which is accessible via the menu bar at the top of the screen. So the first question we have is something that I think, Phil, you did touch on during your presentation. Both Fortescue and BHP, Rio are separately investigating green steel using hydrogen reduction. How does Calix see this impacting their technology?

Yes. So certainly, Rio is looking at what they call BioIron, that's a microwave sort of technology with sort of waste biomass to provide the carbon. So they're not really doing hydrogen-direct production. They're still doing the old carbon-direct reduction. And as I say, they're going to need to have proof and/or actual CO2 capture to effectively have that as a low emissions source. Now having said that, Rio is also part of the HILTCRC. So Rio obviously not putting all the eggs in 1 basket. Fortescue is also part of the HILTCRC. And I don't think Fortescue have their own direct reduction technology. I know they're in a bit of a [ statshow ] over an electrolytic technology recently that's come to light in the paper. But it just goes to show that these companies are looking broadly at several different technologies, even though they may have 1 or 2 in-house, they're hoping will give them competitive advantage. That doesn't stop them looking much more broadly because they know they're going to have to decarbonize and the lowest cost and best technology will win.

Thanks, Phil. We've got a couple of questions about the Paris agreement in the instance that Australia should exit the Paris agreement, would it impact the attitude of iron ore producers to looking at process technologies to support green steel production.

Look, this is an opinion. So it's my personal opinion, but I don't think so. Why? Because where does our iron ore go? It goes into the Asia Pacific region. A lot of it goes to China. China, where does its steel go once it produces it? A lot of that goes to countries that have carbon prices or carbon tariffs increasingly. So if we don't have a low-carbon option for our major export regardless of whether Australia is in and out of the Paris agreement, other countries that are in and being a major sort of export owner, that would actually be a big risk to those companies here in Australia if they didn't have a lower carbon option. So whether Australia is in or out, I don't think will affect just from that perspective. I don't think it will affect the need for these companies to look at a decarbonization solution for their exports.

Great. Just some technical questions now. How does the ability to briquette the iron product impact the value proposition? And is that different to other HDRI technologies?

No. It's the same across all and the need to reach a certain density in the briquette is required before you can ship safely. So iron, as I mentioned before, it reacts with oxygen and sometimes it reacts real quick and heats up. And so that's why you have to have these briquettes of a certain density. That means that there's a certain limitation to the void space and ability for air to penetrate. So that's the key technical piece that you have to meet for these briquettes to be easily exported, say. So it is a technical challenge. It involves only the particle properties themselves, but also the degree of metalization and various other factors. So we've been very pleased that we've been able to produce briquettes, even off our first runs that are really close to those specs. So we're very confident we'll meet the specs required to be able to export properly. So it's critical to the CBP because otherwise, you have briquettes kind of export and that defeats the whole purpose.

[Operator Instructions]. Another technical question, Phil, what's the difference between processing hematite versus other ores? And what's the significance?

Yes. So hematite or hematite ore is at 96% of Australia's export of iron ore. There are higher in impurities and a traditional blast furnace basic oxygen furnace where most of our exports go, they are very good at dealing with those impurities. So if we're producing a green iron from hematite/goethite and we're not trying to remove the impurities, those particular briquettes are fine to go straight into blast furnace basic oxygen furnace steelmaking. Now you mentioned -- if you remember, you can see the fleet of steelmaking move from 25% electric arc to 75% over the next 50 years. That means the blast furnace basic oxygen furnace steelmaking is declining. And unfortunately, a hematite ore in its raw form is unsuitable for electric arc furnace steelmaking. There's too many impurities and the electric arc is not set up well to handle those impurities. So that's where we're looking at solutions like a melter and slager to take the iron that we produce. And so for example, Rio, BHP, BlueScope are looking at that melter slag to take an HDRI slag it to produce a higher grade green iron that can then go into electric arc. The other sort of ore that is around is called magnetite. Magnetite is quite interesting because it's not that red color, it's a gray color. It's a different oxygen state. And it's magnetic. And so magnetite mines, basically, they're mining the magnetite ore and they're able to purify it and get rid of a lot of the impurities through that magnetism, the ability to use magnets to concentrate it up, those ores are suitable for electric arc. Now we've got some magnetite deposits here in Australia, but as I mentioned, it's only 4% of our exports. So while magnetites are possible to go into electric arc, hematites currently are not, and we need to have solutions to be able to move hematites through -- purify them up into electric arc.

And I think, Phil, you've been very comprehensive in all of your comments. Whilst we wait for some more questions to come through, I might actually ask you just to sum up why Calix is so excited about the ZESTY opportunity?

Yes. I guess a few things that have emerged just in the last month or two, Kylie. The amount of work that we've done on the customer value proposition has reinforced to us the advantages that we thought we could see in ZESTY are really there. We know that we can get -- when we know provided we can get the capital efficiency that we've seen in other applications flowing through to ZESTY. So building these at scale, bringing the capital cost down, we can get close to economic direct reduced iron production without even taking into -- carbon into account. And that is, I guess, the end product of having a great technology. There's all those other advantages I talked about against competitive technologies. But the end result is what's the cost of the stuff. We can get close enough to current directly reduced iron prices. Then that in and of itself is the thing that most excites us. And so rather than waiting for a carbon price or waiting for companies to move in response to carbon prices or these sorts of things, there's a compelling proposition is starting to emerge just because it's a great technology, regardless of the carbon price, that's what excites me the most.

Great. Thanks, Phil. All of the questions have now just come through. So if you don't mind going a little beyond the hour. We've got 3 minutes left, but I think there's quite a few here. Can you provide color on the time cost to spin up and spin down the ZESTY reactor and whether there is potential use for energy load management purposes?

Yes. So the -- with respect to -- yes, that question is really about, can we actually run this reactor some of the day, have it off when electrons are not available or cheap? And the answer is yes. So the reactor we're going to design is obviously we have a particular holding temperature, then we can ramp it up pretty quickly to operating temperature and that whole temperature, we can hold pretty well. We may need a little bit of extra heat to hold it, but we can ramp it up to operating temperature really quick. And so the idea there is twofold. If you're connected behind the grid to a renewable energy source, obviously, you run it when electron is available, the sun is shining, the wind is blowing. And then, of course, when they're not, you can hold it at -- if you can hold it at a reasonable temperature, you can react again very quickly to bring it up on speed. The second thing is, if you're connected to a grid and for those who sort of know the spot electricity market in Australia, you can see times when electricity is like really, really expensive and other times where it's so cheap, it's negative in terms of price. So the ability of a technology to ramp up and down quickly based upon the grid-connected spot pricing electricity market really helps with respect to the economics. So that particular aspect is a really important part of ZESTY and unique. Every other kiln that we've seen has tons of material inside. It could only be started up and shut down really slowly otherwise. It impacts on the mechanical integrity of things like the refractory inside those shaft furnaces. So we're pretty unique in the ability to respond quickly to those, either renewable direct powered or low balancing opportunities on a grid.

Can you comment on Fortescue's membrane technology and its likely cost structure? And also, do you have a view on likely cost competitiveness with the BioIron?

Yes, good questions. And I don't yet. I don't know anything about the membrane technology. As I say, the -- I think it's the subject of a bit of an intellectual property [ feeds to Calix ] at the moment when Fortescue and some former employees, so I don't know that technology may be tied up for years in there and not go anywhere. The BioIron is going to be interesting because I think the concept is good. It's an interesting concept where the carbon you need to do the reduction is supplied from biomass, and energy you need is supplied for microwave. The only thing I'd say, all of these technologies require scale up -- and Microphone is 1 of those that I think is going to be interesting and challenging to scale. There's been numerous industrial processes being looked at on the basis of microwave since the '80s, and none have really managed to get out of the lab. So obviously, wish Rio all the best and it would be great to have a competitor in the market space in sort of a slightly different process, no problem at all. But yes, it's going to be really interesting to see how that particular technology will scale. So unfortunately, I can't talk about the economics. We're the only ones that seem to publish economics. We're the only ones bold enough to put numbers out there. So I'll wait and see where these other guys put numbers out there, and I'll talk about it then.

Great. We're beyond the hour. But Phil, I think it's worth continuing to respond to the questions that are coming through. Can you talk about the difficulty in sourcing the vast quantities of green hydrogen, the ZESTY approach would require to scale?

Yes. No, that is an excellent question. I think ZESTY itself will require about 1,500 tonnes a year of hydrogen. That's sort of 20 megawatts, I think, just over 20-megawatt sort of electrolyzer. We don't really have one of those in Australia at the moment. And so -- but plenty are being planned. And so there's ZESTY demonstrated, we're not concerned that we won't get access to the hydrogen to run it. When it comes to the full scale versions, yes, there's going to be significant power required, renewable energy required and significant electrolyzer capacity. Having said that, you have a look at some of the projects that are being developed in the Pilbara itself, for example. We're massive parent energy companies like Macquarie, BP, these sort of companies are already planning gigawatt scale, renewable power production and electrolyzer production in that region. So I think -- it's no small undertaking. I don't let me underbake it. But those things -- it's not as if we're building this in isolation, those projects are happening. And those projects will be significant in terms of scale, and they will be -- and they've been designed that way because of opportunities such as this hydrogen-direct reduction.

Next question. Are you looking to have a wholly owned ZESTY plant? If so, what is the logic for this approach?

With respect to the ZESTY plant itself, alluded to a business model where we get some impact funding into the subsidiary, much the same as LEILAC. So that would be a subsidiary that -- probably be majority owned by Calix. The plant would be owned by that subsidiary. The idea is that, that subsidiary would run the facility as a test facility. It would charge a toll to throughput ores to make briquetted test samples and products. When I say test samples, thousands of tonnes, by the way, would be required because there'd be the quantities required meaningfully by the customers of the iron ore providers. So the big steelmakers in Asia Pacific. And so the idea is that facility runs as a demonstration/commercial demonstrator, charging a tolling fee. And so obviously, we're reasonably confident in our business model. We're obviously in discussions with players about how that could work and what they would mean for them and their customers. That is it. We don't want to own anything else because beyond this all we do is multiply the number of tubes to scale. And so after the demonstrated unit or in parallel, hopefully, as we're doing with LEILAC, we're starting to design 300,000-tonne modules, 10 fold scale-up modules that really the iron ore producer or the steel producer would place at their facilities. And so we wouldn't be providing the capital to build those. We'd just be collecting a royalty of license fee.

Right. So look, what are the possible sources of funding assistance that you would see in scaling up the technology, the government industry debt as options?

Yes, all of the above. Certainly, if you think about green iron and steel and you look at current government sort of rhetoric around what they want to do in terms of supporting local industries that effectively create jobs here, add value here and enable the export of renewable electrons in the form of a green product, always at the top of the list is iron and steel. And so converting iron ore to iron is right in the center of the crosshairs of government policy, that sort of suggests that we've got a pretty good chance of getting some pretty decent support. And so yes, that's absolutely one of those areas that we're looking at for support for funding. The other area is over here in the States, I'm here for a reason. And a lot of the major impact funds are based here in the U.S. funds that are particularly focused around decarbonization. And so the ability to have a look at the -- to have a look at the option of equity funding into a sub is the other area that we're looking at to fund the demonstrator. Obviously, with the current share price, we're totally uninterested in raising capital at the head company level. I think that's highly efficient and doesn't reflect the value that we see in these subsidiaries. So that's what we're going to be doing is looking at how we get government funding and having a look at what impact funding options might be available for a ZESTY subsidiary.

And if you look at the revenue level, again, have you tested the 2% royalty level with prospective customers?

Interesting, and I'll probably decline to answer that at this point because I -- let me put it this way. I wouldn't put that number out there if I wasn't reasonably confident of getting it.

Great. The ZESTY process recovers unreacted hydrogen, how do you remove any pollutions from the iron ore that contaminate the exhaust gas?

That's an excellent question. The only pollutants that could get into that stream would come from the raw ore itself. And so that would be only levels of volatiles in there that potentially evaporate as you hit up those particles. There could be PPM levels of those sorts of compounds. And so the hydrogen that we recycle would gradually build up in those contaminants. And so we may have to have a small bleed. We're not saying we can target what we'd call stoichiometric minimum hydrogen needs, which is hydrogen is only used to reduce. We know that there's going to be some losses. There's always some leakage losses, hydrogen tends to be a rather small molecule where that can lead fairly easily. So there will be some small loss associated with leakage and maybe a very small purge associated with the buildup of any volatile contaminants in the raw ore, but they should be very low. So that's what gives us the confidence to state that we really are targeting minimum green hydrogen use.

Great. And just a couple of more questions just to finish up. Not related to steal, but can you comment on the pace with which we can decarbonize lithium production sooner after PLS pilot? How quickly could we get off fossil gas? And how many plants are needed?

Well, yes, look, I think -- when you look at lithium production, we're obviously targeting tailings and top flotation tailings and these sorts of things, which are very fine materials coming from the run of mine. I think the ability to increase a proportion of the run of mine is certainly on the cards. But I think the ability to take over the whole of Pilbara's production of spodumene and have lithium salt production, that's going to take many years. So I think the real target with lithium is to demonstrate the technology, do the next scale up but also have multiple other companies. The agreement with Pilbara is not just a joint venture with Pilbara to do Pilbara. It's to have the technology available across other companies as well. So we'd love to get to a certain percentage of Pilbara's overall production. And no, in tenfold scaleup is not out of the question. But actually taking that technology across all of the other spodumene producers, allowing them to produce a lithium salt with renewal power at a mine site. And indeed, again, for the first time today, we've disclosed in the commercial pipeline, different projects that we're looking at with respect to lithium. And so it will take some time. We'll get Pilbara for running next year, as I said, we'll get data proof points, operational proof points of that. And hopefully that will allow some of these other projects to proceed at bigger scales in terms of the construction time frame, firming up those projects and then building them maybe 2 to 3 years. So we think lithium could be quite an interesting play certainly in that time frame.

And 1 final question relating to application for alumina. Norsk Hydro recently highlighted in their quarterly their involvement with HILTCRC in their decarbonization strategy. Can you give us any news on how progress the alumina calcination tests are going?

Yes. Look, I think in the public domain on the HILTCRC website, they've published some results from the first alumina sort of study that was done at which we were a part. And suffice to say, we're very encouraged by those results. And we look forward to a deep dive in alumina where we can say a little bit more.

Great. Well, we're actually 10 past the hour. So thank you very much. We've got no further questions. We just wanted to know there is a recording of this briefing that will be made available on Calix' website and it's accessible via the Investor Center. Any further questions that you might have, please e-mail them through to Investor Relations at calix.global. So I'd now like to hand back to Phil just to make some closing remarks.

Excellent. Thanks very much, Kylie. So obviously, thanks all for your attention. Apologies, we went a little bit over, but we do intend to do sort of some deep dives moving forward, as I mentioned on some of the other applications. But we went with ZESTY first because the more we look at it, the more excited we get. So we really look forward to updating the market as and when we can on the commercial sort of progress we've made against the strategy of [indiscernible] today. So thanks again. Have a great day, and hopefully, see you all again soon.