PLS Group Limited (PLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Pilbara Minerals December 2022 Half Year Report. [Operator Instructions] I would now like to hand the conference over to Mr. Dale Henderson, Managing Director and CEO. Please go ahead.

Thanks, Winnie, and good morning, good afternoon and good evening, depending on where you're calling from. Welcome to the Pilbara Minerals half year results call. Big warm welcome. And firstly, to start with, I'd just like to acknowledge the traditional custodians of the land on which our businesses operate in Perth, the Whadjuk Noongar people and up North, the Nyamal and Kariyarra people. We pay our respects to the elders past, present and emerging. For introductions today, the speakers we have, Brian Lynn, our Chief Financial Officer; Vince De Carolis, our Chief Operating Officer. But we also have in the room, Greg Jason, our Assistant CFO; Gavin Spoors, who's our acting IR lead; and we also got Nicholas Read and Paul Armstrong from Read Corporate. Welcome, everyone. Before I get into the formalities of the call, I'd just like to pay acknowledgment to Brian. This is his last sort of public call for us. The last 2 quarterly calls, I had sort of flagged Brian would be sort of departing. He's been very kindly staying on to support us as we progress the CFO recruitment process. But yes, this will be Brian's last hurrah essentially for Pilbara. So for Brian, it's been a hell of a journey from the tin shed in [indiscernible], surviving the downturn and then here we are today with our inaugural dividend, a hell of a journey for business and for the CFO who's stewarded that. And Brian's contribution has been immense. Brian has been the chief architect for all of these key growth steps that we've gone through today. He's driven. He's hyper conscientious, and he's got a -- he's an absolutely live wire in terms of humor. He's been good fun to work with. And he has just a little teaspoon of grumpiness that every good CFO has to have, so emphasis on teaspoon. So fantastic contribution, Brian. A big, big thank you to you. So on behalf of the Board, the team at Pilbara, our shareholders, our customers, our many stakeholders, thank you, mate, for the big 6.5 years that you have contributed to this company. You've been a stalwart and a massive key ingredient for everything that just happened. So thanks, mate. Brian will -- has got a right to reply a little bit later. Hopefully, he forgets about the grumpy bit, but we'll see how he'll go. Now as to the call outline, what we'll step through is a few summary remarks from myself. I'll then hand to Brian for the half year financial results. We'll then go to Vince. He's going to talk a little bit about the guidance for the financial year, and then back to myself to talk about strategy growth and a few final comments around the market and our views of what the outlook looks like. Having gone through that run sheet, we'll then move to Q&A. Given that we've only got an hour today, we'll have approximately 20 minutes for the analysts, 10 minutes for webcast, and then we'll wrap it up on the hour. So referring now to the presentation and stepping to Slide 5. It has been an absolute stellar set of results. And it's just remarkable to think that where we are as a business, Pilbara is in the box seat, and we are ready to continue to thrive. And it's just remarkable to think we're only just getting started. And here we are with this fantastic set of results, inclusive of our inaugural dividend being at $0.11 interim dividend. So it's just an absolute delight to be highlighting this milestone and a key maturity step for the business and, obviously, a reward going back to many of the -- of our loyal shareholders who have gone the full journey of this business. And there was some dark time. So for those long holders of Pilbara, shout out to you, enjoy this first dividend. And we're delighted that we're able to issue this back out to our shareholders. And as to the numbers, an incredible set of financial results. The percentages, as you can see, there are enormous big step-ups across revenue, EBITDA, net operating profit, healthy cash balance in excess of $2 billion, net cash and, of course, the dividends that I met -- that I mentioned a moment ago. And before I get -- step any further into the presentation, I do want to reflect on what we see here today is really the contribution of years of work coming to this point. And there's many teams and people involved in bringing one of these assets and businesses to life, whether it be the Nyamal community, the original customers whom their offtake enabled us to get financing, our financiers, our engineers, our construction partners, our operating partners, the team at Pilbara who have been and have since gone and, of course, the team we have today who are working incredibly hard and, frankly, who are still stepping through our own growing pains and, as recent as last week, had some time with the team who took me through some of those growing pains. So a big shout out to those who have passed, those who are carrying the baton forward. Here we are, a great set of results, so a big thank you to the broad team effort, which has contributed to this. Now moving from Slide 5 to Slide 6. For those who are not familiar with Pilbara, we're developing one of the world's best hard rock assets. It's in Western Australia, Southeast of Port Hedland, a Tier 1 asset offering a 26-year mine life at 1 million tonnes per annum, of which we're only halfway up that expansion profile at a 580,000 tonne per annum run rate. So plenty more growth to come and potentially more growth than the asset itself. We are busy drilling as we speak. So we'll see how we go, that long-life asset, great location and a team which is shooting the lights out in terms of operating performance. Moving to Slide 7, a couple of highlights on sustainability. Community investment, we've signed off on a couple of funding pieces recently, the Earbus Foundation, a 5-year agreement there to provide some ear screening and medical services to the communities near our operations, being Yandeyarra, the Australia area and around South Hedland, and also some funding to the Smith Family for some learning scholarships. As it relates to decarbonization, a 6-megawatt solar farm, that's plugged in, turned on and generating green energy as we speak, displacing 3.8 million liters worth of fuel per year, so great to have that first step of decarbonization underway. And then as it relates to indigenous engagement, the most recent update is our cultural nights, camp nights out in the bush with the Nyamal people. There was a female night head. Great to get that underway, and a fantastic way for our team to learn more about the Nyamal people and the local areas. So thank you to the Nyamal people and shout out to Miriam Stanborough, one of our Directors who opted in to join that. Moving to Slide 8 on safety and people. TRIFR, this a bit of a step up on TRIFR care of a reclassification of 2 injuries, which occurred in the December quarter, so a bit of an increase here unfortunately. As it relates to our lead indicators, our safety interactions, they're going well above our target. Our first cultural survey, fantastic participation rate, 87%. So this was our first broad, deep cultural survey, so good to have that done. The team are working through that feedback now, but a really important step to understand our strengths, understand our areas of work and to work ahead to continue to bolster out the great culture, which is the Pilbara Minerals way. And as it relates to female employment, 22%. It's come down slightly. We were about 24%. So more work to be done there. But 22%, yes, more to happen in that regard. So that's a quick snapshot on the highlights. And with this at this point, I'll now hand over to Brian to step through the financials.

Right. Thanks very much, Dale, and good morning, good afternoon, everyone, depending where you are. Firstly, look, I'd just like to thank Dale for his very kind comments earlier. I would suggest it's been a bit more than a teaspoon of grumpiness on my part, but what I do know is that we've had a lot of fun on the way as well, and that's the part that I'll take away with me. It's been an absolute pleasure serving the PLS shareholders, working alongside a very supportive Board and also so many fantastic employees and contractors and suppliers at Pilbara Minerals. It has just been an absolute blast. I'm very proud of having been part of a team that has taken the company, as Dale said, from a thin shed in North Fremantle to being part of the ASX 50 today. And I do hope, during my 6.5 years with the company, I have contributed in some way to the success of the company. And I feel pretty pleased to be handing over the baton, knowing that the company is certainly in good financial health. All right. That's just a quick summary from me. I'm just saying thank you to everyone and saying what an honor it's been to serve at Pilbara Minerals. Moving on to the financial results and referencing Slide 10. I have to say that I think I'm very fortunate that my last rodeo for Pilbara is to be presenting the stellar set of half year financial results. They reflect strong profitability, strong cash flow, a strong balance sheet and, importantly, the company's inaugural dividend, with all financial measures significantly higher than the prior corresponding period. In a nutshell, this strong financial result has been driven by 3 main key metrics. Firstly, we were able to increase the level of spodumene concentrate production. This was driven partly through the Ngungaju Plant being ramped up to nameplate capacity as well as the decision we made to implement a revised production strategy, which is really to target delivering more tonnes at a lower grade into the market. Secondly, we were able to put most of those tonnes on a ship, so we increased the level of shipments to satisfy strong customer demand. And finally, there was a significant increase in the realized selling price received for our product. This really resulted from strong market conditions and meant that we averaged a selling price of US -- just under USD 5,000 a dry metric tonne, which is significantly higher than the prior corresponding period. Moving on to Slide 11. It's clear that those 3 metrics that I've just discussed really drove some very, very good financial outcomes. High sales revenue at $2.18 billion; EBITDA of $1.8 billion; net profit after tax of $1.24 billion; and, importantly, cash flow from operations of $1.8 billion. All of that contributed to a cash balance at the end of the year -- at the end of the period of $2.23 billion and a net cash position after debt of secured debt of just above $2 billion as well. So certainly a very good set of numbers there. So for the half year, Pilbara Minerals achieved a net profit before tax of $1.77 billion and net profit after tax of $1.24 billion after applying an effective tax rate of 30%. Now it was all about what we achieved at our operation up in Pilgangoora, which delivered a very healthy gross margin for each tonne of concentrate that we sold of, that, in Australian dollar terms, $6,311 per dry metric tonne for the 287,000 tonnes that we shipped. In Aussie dollars, the average realized selling price was just under $7,450. And our unit operating costs, including freight and royalties, was $1,136. So that gives you the margin of $6,300 odd. So if you apply that to the $287,000 -- 287,000 tonnes shipped, and we also include the margin from the Midlands product that we also sold during the period, the operation generated a gross margin of $1.84 billion. And whilst costs were higher during the period, this was largely driven by higher royalties linked to the selling price. This improved margin was achieved almost entirely on the back of a significant improvement in pricing outcomes. And this was largely due to just a very positive market demand conditions for battery raw materials, some exceptional results that we were able to achieve for cargoes, which we sold on the BMX platform, and also the completion of offtake customer price reviews that we undertook during the period. Moving to Slide 13 now. This gross margin obviously translated into a significant improvement in EBITDA. So EBITDA at $1.84 billion, and that flowed into the net profit before tax and then the headline profit after tax, which, as I mentioned before, was $1.24 billion. So now moving to cash flow and balance sheet, so referencing Slide 15 now. The strong EBITDA position also reflected in the cash that the business was able to generate from its operations, with the operation generating $1.8 billion of cash from the operations. We spent about $128 million on capital investments and another $46-odd million on servicing debt and repaying lease liability obligations. And you sum all that through, and we end up with a closing cash balance of $2.23 billion, which is a $1.6 billion improvement from the cash balance at June 30, 2022. In terms of capital investment, the main areas that we invested were obviously the ramp-up of the Ngungaju plant, the investment on the P680 project as we move to increase our production profile, capitalized waste mine development activities. Dale mentioned the installation of the 6-megawatt solar farm as well as expansions of the tailing management facilities. Now referencing Slide 16. The strong operating performance clearly has added further strength to the company's balance sheet with a cash balance of $2.2 billion and our net cash position after secured debt of $2.08 billion, so a very, very strong position. Moving to Slide 18. And I think this for me is the one -- is really the one that really makes me very happy when I see it. They say that a picture paints a thousand words. And I think there's no more obvious example of this when you look at the impact that the company's half year results has had on the company's cash balance. And it's just important to remind everyone and remind ourselves that, over the last 3 or 4 years when business conditions were very tough, Pilbara took some very deliberate steps to position itself to take advantage of any market uplift when it came. And this certainly has played out in spades during the December half with a $1.63 billion increase in the cash balance. Finally, I'd just like to talk about the dividends, so referencing Slide 19. Back in November, we obviously released our capital management framework. And in that, we noted that there was -- we noted the dividend policy, and we said that, that would apply for the first time for the 2023 financial year results. Given the stellar half year performance, the Directors resolved to pay -- have resolved to pay an inaugural interim dividend of $0.11 per share with a record date of the 3rd of March and a payment date of the 24th of March. This dividend represents a payout ratio of 30% of free cash flow as applied to the half year results. The dividend will be fully franked with franking credits starting to be earned when the company commences paying tax from late February, so this month. And once we lodge our 2022 tax return, we will then enter into a monthly installment system and through that build up franking credits. And we are very confident that there will be sufficient franking credits to ensure that our fully franked dividend can be paid. So that's everything I wanted to do in terms of highlighting the key parts of the half year results, and I'd like to now hand over to Vince, our Chief Operating Officer, to cover off on our updated guidance, which we released along with the half year results. So over to you, Vince.

Thank you, Brian. Starting on Slide 20, starting with the production guidance. We previously guided to 540 to 580 kilotonnes of spodumene. And we are now guiding to 600 to 620. This is on the back of a couple of primary factors. Firstly, continued consistent and strong production performance. And then secondly, as flagged in previous quarterly updates, we've progressively tweaked down product grade to facilitate higher lithia production yields. As such, for half 2, we are targeting a slightly lower product grade to maximize product yield and production given the strong market for lithium. Moving to unit costs. We previously guided to AUD 635 to AUD 700 per dry metric tonne of con, excluding freight and royalties. And we are now guiding to $580 to $610 per dry metric tonne, where we've tightened the range and lowered our guidance. The previous guidance was high due to headwinds such as COVID, freight and labor shortages in the regional sector. Some of those headwinds have lessened such as COVID and elevated freight, and we're observing increased stability. As such, we have improved confidence on our expected cost base. And I would also note, the first 6 months of the financial year performed at $595 per dry metric tonne of concentrates sold. So this performance, improved cost base confidence and in combination with increased production volumes has translated into this improved unit cost guidance. Moving on to capital. P680, we recently announced an increase in P680 spend, of which we forecast to spend $195 million for the full year, with the balance to be spent in the following year. Waste mine development, our previous guidance was $130 million to $160 million, and we're now guiding to $140 million to $160 million, which is largely in line. And given the importance of our mining performance on the overall business performance, we are very much targeting the higher end of this guidance to ensure our strip ratios are healthy, which leads to broader base of ore sources that enables improved mineral feed strategies, which have positive downstream impacts in our processing plants. And with respect to project development and sustaining capital, previously, we guided project development to $10.6 million, and now guiding to $37.9 million. And sustaining CapEx was $32.8 million, and we're now guiding to $72 million. The key drivers here are ramping up investment into our business from an earlier period of underinvestment through tough market conditions. We're now prudently targeting capital through a strong capital approval process to areas of business improvements such as plant performance and reliability, NPI, technology and employee hygiene areas, strongly linked to our improving culture. We expect to see continued business improvement through these investments. And with that, I'll hand over to Dale.

Thanks, Vince. Now just moving to a quick recap on our strategy to Slide 22. Our aim is to be a leader in the provision of sustainable battery materials products. So the way we think about that is through 4 key legs. First and foremost, it's about delivering on our operating commitments, making sure the operating platform is shooting the lights out quarter-on-quarter. Second is about expanding that operating platform and making the most of this incredible Tier 1 asset that we have, the Pilgangoora asset, where our mine site is. Thirdly, it's about extracting more value through downstream involvement. And then the last plank of our strategy is around diversifying our revenues outside of the Pilgangoora asset base. But importantly, I just want to highlight, we think about these priorities in that order, operating platform, number one; expanding the operating platform; three, downstream involvement; and fourth, the diversification into other areas. Now just to touch on each of these areas and bridge, moving to the operation, Slide 24. A fantastic graph here, one for the fridge door. It's almost as nice as Brian's cash balance curve. It's a close second, and looking forward to seeing this continue to incrementally step up in the years ahead as we bring on the next legs of expansion. Speaking of which, moving to Slide 26 and talking about our growth. Just wanted to quickly update on the executive team updates here. The team is growing. We've got a couple of the key execs now signed up. Sandra McInnes, our Chief Sustainability Officer, started this week. John Stanning, our Chief Development Officer, he started last week. And Paul Laybourne, we've got his photo up already, he starts next month. So we're delighted to have these executives join the family. They're all -- they all come with a fantastic pedigree of experience in their respective domains, and they couldn't wait to join Pilbara. And who could blame them with where this company is at and where we're heading? Now there's one more to go, which is the new Brian or the new abacus, as it was a politely termed yesterday. We're still working through that process. We are down to the pointy end, and we've got a couple of fantastic candidates as you'd expect. So yes, looking forward to the full set being completed. And this just really speaks to gearing up the business for more growth and to create more value for our shareholders. Now bringing it to the growth pathway that we have in mind, so moving to Slide 27. Just a quick reminder on our staged expansion profile. The P680 project, which bolts on another 100,000 tonnes of production capacity, that's busy being constructed at the moment. It's great to be on site last week to see the civil works essentially complete and materials flowing to site to support that project, and delighted that we've got Primero engaged, our long-term engineering construction partner, busy building that for us. Beyond the P680, the P1000 project, this is going to step us up to 1 million tonnes per annum total production. That project is coming up to FID this quarter. Last quarter, we did approve $38.3 million of pre-FID funding to get the long leads underway to preserve schedule. Our team is busy pedaling fast on both those fronts, and all going well. We look forward to updating on that full FID in the coming weeks. Now moving beyond our base growth strategy around expanding production and moving to value add, Slide 30. So value add, this is all about creating more value through more downstream involvement. And the 2 pathways principally here are -- the first order is about participation in chemicals conversion. Our joint venture with POSCO is underway. They're busy building that plant, and we're looking to be delivering our first product late in the calendar year to support commissioning. And then we've got our midstream joint venture with Calix. What this is about is an R&D project to deliver a different lithium product to market, one in which we think will be superior to the spodumene concentrate we delivered today, superior in the sense that it's a big uplift in lithium concentration, 6% to 35%. Two, a big reduction in waste, the alumina silicate, which is normally present with spodumene concentrate in the order of 90-plus percent is removed and left at the mine site. So that's the second benefit. And the third benefit is about a step down in the carbon energy intensity of the product. And we look to achieve that through the application of Calix' vertical electric calciner. We think it's a winner. The test work is great. The scoping study said, yes, and we're moving forward with the next levels of study to support a demonstration plant. So we're quietly optimistic around this piece. We'll see how we go. The demo plant is a key piece to demonstrate the validity of what we're exploring here. But look, if that all goes well, this could be a game changer for our business and for the industry, but we'll see how we go. But beyond these couple of pieces, we do have more downstream opportunity potential, and that's made possible through this massive production profile that we've got stepping up to 1 million tonnes per annum. We have quite a chunky proportion of that unallocated. So of course, we're turning our mind to what's the best location to commit those tonnes to. So plenty of work happening behind the scenes as we think about that. But in the meantime, we move to Slide 31. Just in the last couple of days, we announced a spot sale linked to lithium hydroxide pricing. Now this is pretty neat. And this piece of work has been in motion for quite some months, as we look to explore effectively a tolling construct to effectively parlay our tonnes for more benefit through -- more economic benefits through tolling. But if I just take a step back, historically, quarter-to-quarter, we've talked about our unallocated tonnes, and we've talked about preserving flexibility. And the reason we've done that is, a, retain flexibility such that we can choose the smartest pathway to market. Now those pathways to market, we've always spoken about several, one of which is the BMX platform spot sales. Two, offtake, either short-dated or long-dated offtake workings with our existing customers or new customers. Or three, a tolling construct. Well, the tolling construct, here it is, and this is our first toe in the water exploring this type of construct. And the reason we've elected to do this is we think it gets us further downstream, which supports our strategic initiatives. And secondly, it's a great economic return. So for those reasons, we've elected to have a crack at this, and we'll see how we go. But we like the idea of moving forward with more. Now that Slide 31 offers more detail around the makeup of that construct. It talks to timing. It talks to the volume. And there's a reference to -- broadly around pricing. But I can assure you, it's a great outcome for Pilbara and Pilbara shareholders. And yes, as I say, looking forward to exploring this further in the months and years to come. But whilst we're talking about this piece, I do want to address two points, one about some of the recent articles, and the second I want to speak to is disclosure. So yes, we had some articles, which really took snowboard effectively, reporting on rumors that there had been a failed auction by raw materials, lithium supply. Well, as per our announcement, I just want to make it clear. Unequivocally, there was no BMX auction undertaken by Pilbara Minerals in the last few weeks. There was none. So as -- and as we've articulated in the announcement, we did do a pre-auction bid, which we've done from time to time, and what that is about testing the market for pricing. And sometimes, we've awarded on those pre-auction bids as we've done historically. If you look back at our 13-or-so BMX auction, sometimes, we've elected to do a pre-bid auction. Sometimes, we have gone forward with the BMX auction. In this instance, we chose not to do that, and we chose to elect this other opportunity, which we've been having, working in the background. So that's the truth. That's how it is. And there's nothing more to be said, really, but I just wanted to make people very clear about what's driving Pilbara Mineral's actions. And as I say, unequivocally, if there's a thought that there was a failed BMX auction to Pilbara Minerals recently, it is simply not the case. The second item relates to disclosure. And our guiding principle here as an ASX-listed company is if we've got a material update, we will update the market. We absolutely will. We have to. And so as we think about future BMX spot sales, will we be disclosing that to market? If we think it's material, yes. So in the current environment, if we were to do a BMX auction, yes, we would disclose it in the current environment because we -- the view we would take is it is material. So I just wanted to make that point clear as well. And as to, before the question comes, what will we do in terms of the next BMX auctions or more tolling, as we've said in these past quarterlies, we will retain flexibility and we will continue to explore each of those pathways to market simultaneously in parallel, and we will select the best option, we think, for the business. And with all of these, these are basically bridging steps, as we move to more long-dated downstream involvement because that is the key prize and that's what our sights are trained on for the long term, a la POSCO joint venture. So moving to the homestretch, I'm conscious of time and just offer a couple of comments on the market. Moving to Slide 33. The sky is not falling, and it looks pretty good to me. There has been some pullback on pricing, particularly within the China domestic market. I would point out that January spring fest is always a soft month. And even in the short history of the lithium industry, if you look back at 2018, 2019, 2020, '21, this is the time you see a pullback, and domestic pricing is a function of the slowdown in the China market. So we are seeing a bit of that. But what I put to everyone is just remind everyone of the structural shift, which is underway. What we see is, which everyone sees through the headlines, more EVs, more investment. So that is definitely moving forward. And then the other piece I could offer is what does Pilbara see as a major lithium materials participant, and it's all positive. So our engagement with customers is all positive. They have -- they ask for more tonnes. They want more tonnes. Inbound inquiry continues with nonparticipants, existing participants, et cetera. So Pilbara enjoys the enviable position of being one of the few major lithium operators who's producing, who's got a readily expandable platform to deliver more tonnes to the market, and with no shortage of inquiry of groups wanting to partner with Pilbara. So the long game remains positive, and we remain -- we have got our sights firmly set on continuing to grow our business in this category. And lastly, to finish, yes, the lithium deficit. So this data is clear benchmark. This is a refresh of the data they provided us recently. And I'd point out that, in 2030, this graph -- the last version of this graph, there was no gap. Demand equaled supply, but there's a gap now. And then at 2040, that gap has now widened. And at 2040, that 2.6 million tonne LCE deficit, that's the equivalent of 18 Pilgangoora operations. So don't forget Pilgangoora, one of the largest hard rock operations globally and that 18 is size of 1 million tonnes per annum. So I'd remind everyone of that and also remind everyone of how long it takes to bring these assets to life. But Pilbara was 4 years from first drill hole to operation, and that is breakneck speed. The world needs heaps of lithia. It's going to take time. The existing operators like Pilbara Minerals are in incredible position. And pay homage to our founders and the team which followed -- who had the conviction and the vision to see the opportunity, which is unfolding. And here we are today. Pilbara Minerals are enjoying the benefits of being that first mover. And the dividends we have today really speak to that. So thank you to all those who have come before. So that's a wrap from us. We're slightly -- went slightly longer than I hoped to, and in the closing sort of 25 minutes keen to take some questions. So at this point, we'll hand back to Winnie to take some questions. Over to you.

[Operator Instructions] Your first phone question comes from Hugo Nicolaci from Goldman Sachs.

Congrats on the inaugural dividend. My first question was just more of a clarification on the guidance. You used to disclose capacity -- production capacity that is on SC6 basis. Now noting Slide 6 would note that the current capacity is on 5.7. I just wanted to clarify, firstly, that's driven by Ngungaju performance and if that's one of the growing pains you mentioned, Dale. And then noting that grade change, how much of the production guidance increase would you attribute to the lower grade, high-volume strategy? I'll come back with a second.

Sure. Thanks, Hugo. So on the first point, as to product grade, for last quarter, we were approximately about a 5.2, and we will look to probably tweak that down slightly. As to the why the product grade is lower, that is in no way related to any sort of production performance issues. We were quite comfortable about both the Pilgangoora and Ngungaju operations that turned up. They're working well. There will always be further optimization, but they are controlled, and we're happy with that performance. To the reference around growing pains, that was more actually to do with just some of the support infrastructure we have around mining, nothing relating to the processing plant. We've got some simple enabling infrastructure we need to get in place, which supports the larger fleet that we have, yes, and that's about it. Did that answer your questions there?

Yes, that's great. The second one, I guess, a 2-part on pricing. I mean, firstly, on the toll linked price, were you given an option to lock in a forward hydroxide price, rather than taking that market pricing risk? And if so, how different or how far below versus the current forward pricing would that lock-in pricing had been, if you can give a guide? And then the second part on pricing, obviously, recent price movements that you touched on. One of your peers this morning was pointing to regional indices convergence and geographic exposure potentially shielding them from the Chinese chemicals price declines. I was just wondering if you can give us any commentary around the discussions with offtake partners now looking forward to the next quarter. Or I guess, more directly, how does the $6,300 price you referenced in December look today?

Sure. Okay. It's a bit on that one, Hugo. In terms of the way we've approached this area, we have engaged broadly across the industry to see what the options are in terms of who we want to partner with tolling. It's been quite a thorough process. And then within that, we have, of course, looked carefully at how we consider pricing. But as per the announcement, you'll see that for this particular construct, pricing is timed all around the shipment and -- the shipments essentially leaving in terms of spodumene and the arrivals in terms of chemicals. And this is all about us effectively sharing that pricing risk with the converter. So I'd point to that as a bit of a guidance. As to the convergence or the pursuit of various different pricing regimes, the philosophy we've had with our offtake partners has always been about marrying our pricing mechanisms to the products and markets in which they're selling. That's the broad principle, and that would be the broad principle, I think, we'll look to use as we move forward. Now the good thing for Pilbara is we have got a broad base of the Tier 1 chemical converters who export internationally. You'll note that, that pricing is holding up well relative to the domestic pricing at this moment in time. So Pilbara feels pretty well placed for that. And you might also note from our spot tolling sale that, that pricing is tied to that export pricing as well. Hopefully, that helps in fair bit of detail there, Hugo.

Your next question comes from Max Vickerson from Morgans.

Can I ask a little bit about capital cost inflation? There seems to be pretty different rates of inflation in those different parts of guidance you mentioned earlier. Firstly, what are you seeing in terms of forward-looking inflation? Is it kind of settling down now? And how should we think about the 1 million tonne per annum expansion in terms of does it kind of set at the lower end of the capital inflation guideline? Or is it maybe potentially towards the higher end?

Yes, sure. No, I'll offer a couple of comments, and then Brian can probably weigh in on this one as well. So as it relates to capital cost inflation, we're feeling more comfortable that the inflation largely is more under control. We're certainly seeing that at the operating level, which is good. And there are some subpoints around, say, for example, freight, which is really has come back from the highs to more what we used to have historically, which is good. We have factored in higher costs. And as we think about capital, and we have a fairly good feeling around that given our recent market engagement, we're doing long leads, et cetera, et cetera, so that all sort of flows into the estimates we have, which gives us more confidence. But obviously, we can't be too sure what happens in the future. Nobody can. But we're feeling that we've got a higher degree of confidence. As it relates to the P1000 capital decision, we'll provide, obviously, much more insight once we do that FID. So if you could wait for that one, we'll obviously be fulsome in that response there. Brian, anything to add on this?

No, I think you've covered it pretty well there, Dale. Yes, that's -- I've got nothing else to say.

Your next question comes from Levi Spry from UBS.

If I can just go back to the tolling agreement, can you -- I had a few questions around the duration risk. So can you just confirm that it's [ 2 plus 1 ], i.e., the price is set on the 20th of March. And what index is it referencing? Is it one that we can look at like the fast markets?

So the time lines are fairly -- well, they're pretty narrow that we've given on that Slide 31. As to the specific reference, no, we're not going to be disclosing that sort of level of detail on that one. Sorry, Levi. But fast markets is a good one to look at. There's a few others there.

But the price is 1 month, it's 1 month from when it set sail from the 20th of Feb.

It's -- the price split in 2 parts, a spodumene price and then a corrective piece later, which is detailed on Slide 31.

Okay. Cool. I might come back to that. And then just in terms of the -- you talked to the unallocated portion in time. Can you just give us in terms of the growth to 1 million tonne and bearing in mind that it might be running a bit above that, depending on what grade you're producing? How much of that is unallocated? Can you maybe just remind us sort of the breakdown there, i.e., the 315 that goes to POSCO, what is -- how much is left?

Yes, sure. So yes, so Levi, once we fully expanded around the 1 million tonnes per annum, there's approximately 300,000 to 400,000, depending where we take offtake agreements and depending whether we go a bit higher as a function of the product growth. So it's broadly 300,000 to 400,000 unallocated.

Your next question comes from David Feng from China International Capital Corporation.

Yes. So this is David from CICC. My first question is in terms of your definition for free cash flow. I ask why only CapEx on sustaining capital, instead of the total amount of all your CapEx is included in your free cash flow calculation? And in terms of your free cash flow in the second half of FY '23, given that you just started paying tax from February and the potential high CapEx compared with the first half, does it make sense for us to expect a lower free cash flow in the second half over the first half of FY '23? I'll come back with the second one.

David, it's Brian now. I might have a go on those couple of questions. So in relation to the free cash flow and why it only includes sustaining capital, it's all linked to a percentage of cash flow that we allocate to pay dividends. So the view is because we're only paying between 20% to 30%, that means you're holding on to notionally 70% to 80% of the cash flow. And that's all around having cash available to expand the business and look for other -- both organic and inorganic growth opportunities. So that's what's driving that sort of decision around how we think about the capital -- sustaining capital. In terms of the free cash flow in the second half, it's very -- today, we sit here, it's really -- is going to be price dependent. What we can control is we can control, I think, the level of production and sales. We can hopefully have a red hot crack at controlling our costs. The price is unknown, so it's very hard for me to sit here today and tell you, I think, we're going to have a dividend and that dividend is going to be higher or lower than the first half. But what I can certainly say is that given we're now in a -- in the regime where we're paying tax on a monthly basis, the issues around whether we have sufficient franking credits goes away.

Okay. Understood. Okay. So just maybe have any color on how should we expect your mid- to long-term CapEx on sustaining capital and waste mine development? Would your expenditure on the sustaining capital grow proportionately with your volume or it will just largely stay flat in the future?

Yes. So David, I think sustaining capital as it relates to the [indiscernible] effectively stable. So for -- once we've obviously expanded, the absolute number will increase. But from a percentage basis for the processing plant, that will be effectively the same.

Your next question comes from [ Matthew Starek ] from Red Dog Capital.

I just wanted to ask a quick question about -- again about the tolling arrangement. I guess, it's probably got 2 parts. But I guess, simplistically, when you say -- I'm just trying to work out what aligned actually means. I think last auction, you had 8,299 SC6 equivalent. Does that mean you're getting somewhere over at the current lithium hydroxide price, not the future price, which we don't know yet? Does that mean you're getting something over $8,000 a tonne under this arrangement?

I guess, that would be the inference given that it's aligned with it. What we've tried to do here is give a broad guidance without disclosing too much. At the end of the day, this is commercially sensitive, and we need to be respectful to our counterparty in this regard. But absolutely appreciate that everyone is looking for as much detail as possible. I'm sorry. We can't spell it out and -- all the detail. But is it a number north of 8? Well, based on January's pricing, well, it would be.

Excellent. That helps a lot. And just as a follow-up to that, I guess, does it imply -- given the tolling arrangement that the amount of the hydroxide -- or sorry, carbonate -- or the hydroxide price, you're getting a bigger share of that in price, and the toll treatment as a much thinner margin than, say, the toll treater would take in a normal situation just buying carbonate from you in taking the price risk themselves?

So the way we think about toll treating is you -- the broad idea is you're effectively fixing a process and cost, and then there's a floating pricing point. And then it's a case of how do the proceeds get split, whether that's the best economic outcomes, a function of what we can get to with the other pathways to market. We've got comfortable with this construct. As I mentioned in the opening, it's a toe in the water. It's a spot sale. It's our first crack. But we think there's merit and continuing to explore this type of model.

No, I'd agree. I think it makes a ton of sense, especially if there's spare capacity out there in the market for sure to process this material. And can I just ask one other question? I'm sort of lost a little bit of track with the POSCO joint venture. All things go into plan and assuming you exercise your 30% or your -- to go from 18% or so, you've set your option, you'll have 13,000 tonnes per annum, a roundabout of the 43,000 tonnes in total by around mid-calendar year 2024. I guess, when does that get to full -- when -- what's the time line of a ramp given we've been seeing probably in the market a little bit of a few delays around it, but how POSCO feeling about the ramp-up of that production? And I guess, will that be -- I mean, you'll take your share of revenue. That's 30% of -- if we say hydroxide prices of $75,000 on fast markets today, something like AUD 1.4 billion of revenue at the current exchange rates. Is that ballpark? And when is that -- when do you think they'll be at 100%, I guess?

Yes. Thanks, Matthew. Look, I think later in subsequent quarters, we'll start to provide a bit more insight into what the outlook is for the project. As you can appreciate, right now, it's still coming out of the ground. What POSCO has guided us is, at least, their current plants are quite elongated. They've taken a modest ramp-up profile for the operations. So what I'd add, that POSCO is quite conservative, which we like, but it was in the order of sort of an 18-month sort of period to ramp up, yes. So -- but as to the split of the winnings, yes, as per the equity split that you mentioned.

Excellent. And sorry, just one last question I thought of. That's a pretty simple one. It looks like for the last 6 quarters, you probably shipped around 50,000 tonnes less than you produced for the last 1.5 years. I guess, is there any plans -- I guess, it's $300 million or $400 million of material. Is there any chance that will -- you'll get back -- you'll be able to draw down and ship more? Or what's the -- is that right? I'm just taking the sales and what you've been producing.

No. The inventory levels should be that high from memory.

Maybe if I can have a go. There was one shipment that we're hoping to get out in end of December, which didn't quite make it because of port congestion, so that would have been another 20-odd thousand tonnes that would have gone out, which obviously went out in early January. If you exclude that, then sort of the level of concentrate inventories that we would normally carry, which is, in essence, about 3 weeks' worth of sales, would have been about normal. So there's about 50,000 tonnes of concentrate at the end of December, but 20,000 of that went sort of within a couple of days of the end of the first -- by the end of the half year.

Your next question comes from Luke Smith from AustralianSuper.

I've got just a follow-up question on your first phone call from the first question. The P680 and P1000 lowest capacity numbers, are they based on less than 6% SC now?

No, they're based on SC6.

Okay. And so just current guidance of 580 is based on 5.7.

Yes.

Your next question comes from Milan Tomic from JPMorgan.

You mentioned revenues from middlings products in the half. Do you have any potential to maintain these sales? And what kind of demand are you seeing for these lower grade products?

Yes. So as it relates to middlings as part of the ramp-up of the Ngungaju plant, the team has streamed a middlings stream, which is effectively through a commissioning sort of phase. We're not doing that anymore as a function of having completed some of the optimizations, the full circuit. Let's take the processing and upgrading, everything, which is, of course, what we want to do because we want the higher grade sort of SC6 or SC5.4, et cetera, products. So we're not looking to produce middlings. But as to those middlings we did produce what was the market like, yes, we had quite a few offers for that product, and we had no issues of moving it. But yes, as I said, it's not a product we want to do because it's lower value.

Yes. And just if I can get a second one in as well. With regard to tolling arrangements, it's given you the benefit of revenue diversification and an incremental exposure to hydroxide. Do you think there is appetite for these partnerships in the future? And how are you thinking about weighing up direct investment in downstream versus lower CapEx tolling products?

Yes. No, good question, and we think deeply about these different constructs. But one thing we're sure about is that the highest order price is to be a downstream participant. That's without question. What the thinking is, well, which -- how do you go about that is that where it's the location, do you do it in partnership, et cetera. But I think the way we think about tolling is as a bridge to that in destination, and it's a pretty good bridge, we think.

Your next question comes from Mitch Ryan from Jefferies.

I've just got one question, and it's with regard to the toll trading agreement just for a change. One of your peers has reported toll trading costs of between AUD 8,800 and AUD 7,800 a tonne today. Is that in the realms of what we should be thinking for the conversion selling costs that would be in your agreement?