Syrah Resources Limited (SYR) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Syrah Resources Limited Q1 quarterly results update call. [Operator Instructions] I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead.

Thanks very much. Good morning and thank you for joining the call today. With me on the call are Stephen Wells, our Chief Financial Officer; and Viren Hira, GM of Investor Relations and Business Development. The March 2023 quarter has seen strong progress on the downstream expansion project construction and the further expansion project, DFS released today. Thus the recent development of volatile market conditions facing Balama has created further challenge in reaching positive operating cash flow. The quarter and the period ahead encapsulate everything that's unique about the developing graphite and anode position in the lithium-ion battery supply chain, enormous opportunity, rapid learning and the need to adapt short-term actions within longer term strategy. Amidst the positives of lower freight rates and increased shipping availability, the short-term natural graphite market situation has weakened and somewhat slower momentum in year-on-year EV growth has fed through to lower-than-anticipated sales volumes. Pressure on price from inventory across the supply chain has resulted in lower production and sales and too high C1 cost. On the other hand, the ever-growing downstream opportunity is highlighted by continuing extraordinary factory manufacturing capacity build-out in the U.S. and strong market and government support for Syrah's AAM capacity expansion, providing an increasingly positive market position for Syrah as an ex-China anode supplier. The short term is dominated by China supply chain exhibiting challenging commercial behavior as incumbents and new entrants drive for anode market share through natural and synthetic graphite procurement and production. Accordingly, we've taken steps to strengthen the company's balance sheet to be well prepared for any further potential natural graphite market volatility, whilst ensuring project construction and development momentum in the U.S. are maintained as we head toward a final investment decision for the next phase of Vidalia's development. We'll divert a little today from our standard quarterly structure and cover 3 main areas. Firstly, a more detailed look at the natural -- graphite market' conditions and the immediate challenges in front of us; both in navigating the situation commercially and how we think about Balama's operating methodology to better deal with dynamic volume requirements and unit cost reduction when demand is lower. Secondly, the progress and exciting future for our Vidalia operation and project development, looking at the DFS release for the Vidalia further expansion project to take the next step in growth and diversify our business towards the downstream. And thirdly, outlining our near-term cash position and how we intend to navigate funding requirements to provide the best optionality in line with expected milestones with the support of AustralianSuper, our largest shareholder. These 3 elements combined to chart the path to a final investment decision for Vidalia as customer and funding arrangements are finalized and that's anticipated before the end of the 2023 calendar year. So turning first to the market, and we'll look at Slide 7 and 8 of today's presentation pack. As noted during the last quarterly update, visibility of China's natural graphite demand and anode production was poor in the early part of the first quarter, impacted by both the COVID-19 reopening and Chinese New Year holidays. Uncertainty continued in market volatility increased during the quarter and since quarter end. Analysis of the major drivers of natural graphite demand and pricing demonstrates the leading indicators of EV sales and anode material production whilst growing strongly year-on-year weakens considerably quarter-on-quarter in the March 2023 quarter. And the year-on-year growth rate at 32%, while still strong, was lower than the full growth of 64% last year. Battery cell production growth rates in China have outpaced consumption. An analysis demonstrates that even with some higher scrapping rates due to new production quality, apparent cell inventory grew through the latter part of 2022, leading to a slowing of delivery requirements in spot market liquidity for anode material and natural graphite so far in 2023. This is not unique to anode material and graphite if the significant spot price declines in other battery materials such as cobalt and lithium. The difference, of course being higher prices earlier in some of those other markets. Anode material production increased 94% year-on-year in 2022. And similar to cell production outpaced EV demand growth, which led to a current inventory buildup towards the end of 2022, with the gap visible in the top left chart on Slide 8. Anode material production fell around 23% quarter-on-quarter between the Dec '22 and March '23. Over the past 2 years, the 2 major Chinese anode material producers have seen 5x and 2x volume growth and 20% to 30% decline in margins. Domestic competition in China is hurting even the strongest producers as it expands and new domestic entrants are under significant pressure since they seek market share. Anode material margins decreased for the top 6 producers in China last year. And there were 5 of the top 6 producers in China last year, and they were flat out of 6. Chinese artificial graphite anode production capacity growth has been stronger than natural growth over the past 2 years. Given both the lack of growth in domestic natural graphite mine supply and the constraints on delivering from Syrah during that same period due to shipping, natural graphite processing capacity utilization has lagged somewhat with the anode material demand gap being filled by high emissions power intense artificial graphite products. As that capacity expanded inventory built and this has seen intense Chinese domestic price competition for market share in artificial graphite with prices falling faster than declines in the key costs of artificial graphite anode production. [ Legal ] cost, power costs and the resultant graphitization costs in China have declined and are back at or below 2020 levels falling 50% from their peak. Whilst in the ex-China markets for battery cells, our experience shows that there's little flexibility for short-term cost base switching between anode material types. The Chinese domestic cell production market may have at a higher tolerance. And though but constraints natural graphite supply and a decrease in the cost of artificial graphite anode have been in place. Some switching appears to have occurred in the short term. In conjunction with overall inventory levels across the anode market, this may have contributed to weaker near-term demand for natural graphite anode products. Spherical graphite processing capacity in -- for natural graphite anode material in China, which is largely independent of integrated mine supply has expanded in recent years and additional capacity in natural graphite anode material production is under construction today, which bodes well for future import demand for Syrah. The Chinese natural graphite anode supply chain remains disaggregated with separation of entities between mining, beneficiating ore concentrate processing spherical graphite and producing anode. And whilst there are some integrated projects, many are reliant on upstream third-party sourcing of natural graphite domestically and on the import and that's primarily from Syrah. Domestic production of natural graphite in China is seasonal, with mining closures during the Northern winter and that can be seen in the top right chart on Slide 8. Historically, this has led to consumers building stock through the year and supply being very tight through winter with increased prices, especially as anode material became a larger demand segment. Over the 2022-'23 northern winter this supply tightness appears not to occur due to a combination of the anode inventory impacts mentioned earlier; spherical production capacity outages during the COVID reopening and due to a shorter and warmer winter outage period than normal. As the first quarter of 2023 evolved and China reopened downward pricing pressure built over the period of the year when pricing is historically almost always increased. And this wasn't fully evident until recent weeks' spot market liquidity has been relatively low. On a positive note, despite the significant increase in natural graphite demand driven by EV market growth, overall Chinese domestic mine supply for natural graphite has not increased meaningfully over the past 3 years. And Syrah is the primary balancing market tonnage in China as demand has grown. This can be seen by the price increase when the market is in a net import position, which is shown in the bottom right chart on Slide 9 -- Slide 8, sorry. In addition, product grade and particle size distribution position Syrah's Balama product strongly for anode material production, particularly when power and reagent costs are high and environmental restrictions are current. And as demand continues to grow, Syrah's importance and position on the cost curve and higher utilization is extraordinarily valuable. The near-term reality now apparent in April is that the inventory overhang in cell and anode production has been more significant than anticipated. And as late Q1 and April have evolved, sales volumes have lagged and deferred. Price bids have declined recently and current inventory will see Syrah communicated position of moderating production with purchase bids fall below a level that would support basket pricing above cost of production at sustainable volumes. So in summary, bringing that position together a number of factors, are impacting us in the short term: EV sales growth while still strong and slowed pace year-on-year and quarter-on-quarter; anode material inventory built up through 2022 is consequently taken longer to clear; anode material producers have been able to secure cheaper graphitization costs in artificial graphite; and all of this occurred during the normal winter production outage for natural growth line in China. China had a shorter and warmer winter with supply capacity capable of returning earlier. And whilst China domestic production is online, in many cases, at the moment, cost of production is reported to exceed current prices. Syrah's experience of Chinese customer purchasing behavior remains extremely short term and heard like. And that leads to volatile contract performance and creates a whipsaw effect in market conditions. There are very positive factors ahead. Overall, EV demand growth continues and anode material inventory will clear. March 2023 global EV sales were again above 1 million units, matching the run rate late in 2022. Chinese natural graphite anode material capacity is increasing. And that requires the Chinese mine capacity growth has been low and grade remains a challenge. Chinese mines are reported to be under cost pressure. And the U.S. Inflation Reduction Act means that anode material producers are accelerating plans to build capacity offshore in places like Korea, the U.S. and Indonesia that require ex-China third-party feed. Finally, ESG implications mean that higher volumes of natural graphite over more power-intensive artificial graphite will be preferred in ex-China markets. So the implications for Syrah today are that, in the short-term, China inventory rundown time is required and recovery of EV demand growth needs to flow through to anode material demand. Syrah will focus on immediate sales from inventory and cost reduction in operations, inclusive of requirements for our solar and battery plant start-up this quarter. And we'll review a broader suite of Balama operating methodology options to determine how the operation can respond to market conditions more dynamically while focusing on quarterly production costs and margin generation. And we'll continue to reiterate a clear requirement around pricing compared to cost at a sustainable production volume. I'll hand over to Steve to make a couple of initial comments here on Balama before we talk some more about those operating options. Steve?

Thanks, Shaun, and looking at Slide 11 to 14. The ongoing volatility in sales volumes, inventory levels and resultant production throughput impacted operating performance at Balama during the quarter and recoveries in unit costs underperformed the improving trends developed through 2022. And as a result, this month has seen a COO-led deep review and recommitment to the improvement actions on both the recovery bridge and equipment management projects and to cost containment at site. Balama production volume in the first quarter was 41,000 tonnes, which is higher than sales. But the key metric performance was lower than prior quarters with recovery at 71% and C1 costs of $668 per tonne, primarily due to production volume impacts and diesel costs. March performance showed improvement with recoveries of 76% on higher monthly production. The primary issue for the Balama operations team is that they have started each recent quarter with the view of being able to run hard on an increasingly positive market outlook that have been repeatedly interrupted in operational continuity due to shipping or market-led inventory constraints. As a result, the company has 3 key actions underway at Balama: Firstly, reinvigorating our embedded continuous improvement processes to regain the performance improvement trend of last year; secondly, assessment of operating methodology options to maximize efficient volume production and minimize costs. And solar is a key step in this front for the current quarter and we will continue to find alternatives to improve our production costs in periods of volatile demand; And thirdly, leadership and cultural development actions to leverage the momentum out of the company level agreement negotiations of the fourth quarter in last year. There is a strong commitment from the team to deliver improved performance with a clear operating runway. And I'll now pass you back to Shaun.

Thanks, Steve. And as Steve noted, Syrah's dependence on China sales means that more must be done to find operating alternatives during periods of market volatility. Attempting to navigate the situation only through awaiting outright market growth has not provided us with a wide enough range of options. And accordingly, the company is undertaking a broader review than it has been done before, aiming to drive greater adaptability of the operation to a more dynamic volume requirements and an acceptable unit cost. And this may include combinations of how we work through inventory management. It may look at capital projects or operating rotations at Balama. Current China demand conditions and availability of material to sell from inventory mean that production will be moderated from Balama from next month until demand and price conditions or contract commitments warrant. Current staffing levels will be maintained to ensure flexibility. The operating team will focus on improvements, bring forward maintenance and minimize costs in the short term. The completion of the solar battery project within the quarter will see operational testing and assessment of production scenarios favoring renewable power sourcing and cost mitigation. Otherwise, at Balama during the last quarter, Syrah continued its high performance in sustainability activities. And we've noted many of those in our quarterly sustainability report, which was released on our website today. And importantly, the recent security environment in Cabo Delgado has shown an improvement since last year. Moving now to the Vidalia further expansion, DFS, on Slide 15. Today, on a very positive note, Syrah announced the completion of the DFS, the expansion of Vidalia's production capacity to 45,000 tonnes of anode material, inclusive of the 11,250 tonne anode material facility is currently under construction. The project DFS incorporated much learning from our current operating facility and the initial expansion project and confirmed the expansion to 45,000 tonnes is technically viable, financially robust and is expected to deliver significant value for Syrah shareholders and other stakeholders. 45,000 tonne Vidalia facility was assessed across a pricing range of $5,000 to $7,000 a tonne of anode material on a 2023 real basis. And across that range has an estimated NPV of between USD 208 million and USD 794 million, an unlevered IRR of between 14% and 23% and payback period from commencement of operations of between 4 and 6 years. The facility is forecast to be financially robust high-margin operation, with estimated annual EBITDA of between USD 103 million and USD 192 million and an EBITDA margin of between 44% and 60% across this price range. The deeply considered scenario reviews for the DFS assessed a final total installed capital cost estimate of USD 539 million, including the USD 38 million contingency to commissioning of the facility. The higher CapEx than prior estimates is not unexpected given inflationary factors in the U.S. and across global equipment producers. But importantly, the project demonstrates capital efficiency against a 3x current capacity project base and installed operation and delivers key OpEx benefits. An estimated steady-state operating cost all in of the integrated 45,000 tonne facility is $3,023 per tonne, assuming Balama natural graphite cost is USD 425 a tonne FOB Nacala. The pricing, CapEx and OpEx inputs for the project have been built on experience and from a realistic base, our interaction with suppliers, customers and the experience of product development, construction and capital project management have provided the important context for the budget and time line, which estimates a Q3 2026 start-up, which is well aligned with the U.S. market demand profile. Syrah intends to immediately proceed with the transition phase for further detailed and long lead item engineering and activities related to permitting, acquisition of adjacent lands and preparation works to maintain the project momentum. And those things will be undertaken ahead of a final investment decision to be considered by the Syrah Board before the end of this calendar year and as soon as customer and financing commitments are finalized. Further information regarding the key assumptions, financial and economic outcomes and the implementation of the Vidalia further expansion project are contained within Syrah's separate ASX release today. This further planned expansion of Syrah's wholly-owned and integrated spherical, purification and furnace operation at Vidalia, which uses natural graphite from, Balama is compelling, providing to U.S. customers a combination of scale, diversification and sourcing risk, Inflation Reduction Act compliant domestically processed product and a fully traceable lower emissions intensity production path for material then occurs from China. Moving to Vidalia's current project execution on Slide 16 to 19. Construction of the Vidalia initial expansion project is progressing within the planned schedule under the management of an integrated Syrah and Worley Group team. Detailed engineering was fully completed during the quarter. Mechanical, electrical and instrumentation and equipment installation work fronts have intensified through Q1 and will peak through the next 2 quarters. The teams are doing an outstanding job, noting that we are constructing an integrated facility that has not been done outside China at a commercial scale. 90% of overseas fabricated equipment has been delivered to site by the end of the first quarter and the remaining items were shipped for arrival on site within the June 2023 quarter. Key activities progressed during the first quarter with steel erection, roofing and cladding of the milling and furnace buildings, equipment assembly and installation in the milling building, furnace section installation, interior and exterior structural steel installation and final mounting of the first power distribution center. Activities expected in the current quarter are focused on advancing structural steel, ducting assembly and equipment installation, field fabrication of processed tanks and progressing various other activities for the purification area, piping installation and taking delivery of the second and final power distribution center. Operational readiness for the 11,250 tonne Vidalia facility, which includes preparing business and maintenance systems and operating teams through the commissioning, is on track for commencement in the September 2023 quarter. The total Vidalia employee count was 63 at quarter end and a further 45 roles are planned to be recruited prior to the start of production. There are approximately also 250 construction contract personnel on site. And safety is the primary focus in conjunction with projects construction progress. The total estimated installed capital cost, including contingency of the Vidalia initial expansion project was revised to USD 180 million on known variances with potential variances being investigated ahead for a potential capital cost of USD 186 million. And that's compared to the $176 million cost estimate at FID. The utilization of the contingency to date has been principally for higher labor-intensive construction costs, to preserve the project schedule and true-up costs of certain mechanical and electrical work following finalization of detailed engineering. At quarter end, total installed capital costs of USD 178 million have been committed to, of which USD 100 million have been invested. I'll now hand over to Steve to discuss the financial position and the key development in our balance sheet support. Steve?

Thanks, Shaun. This quarter, we are reporting our total cash balance as well as noting the difference between restricted cash and unrestricted cash as a result of the first drawing of the Department of Energy loan to fund the construction of the 11,250 tonne facility Vidalia. Total cash at the end of the quarter was $84 million. Restricted cash at the end of the quarter was $36 million and represents cash balances held with the Vidalia project in operating accounts, loan accounts, including from the first drawdown and reserve accounts. This separation of accounts and cash from the unrestricted group cash balances is a result of the successful initial drawdown of loan funding from the DOE loan facility, which occurred through the quarter of $21 million, and which has been followed since quarter end by a second drawing of $44 million. As part of the first drawdown, we were required to fund certain loan reserve accounts, typical of a project finance transaction as well as initial funding for a ramp-up reserve to ensure there is sufficient working capital for an orderly ramp-up and operation. Any funds in reserve accounts not used through construction will transition to those ramp-up reserve accounts and then subsequently into operating reserves noting, of course, that even without debt funding, Syrah would be setting aside funds for working capital through ramp-up as an example. Restricted cash also includes balances drawn down from the loan that have not yet been used to fund project costs. Unrestricted cash represents cash elsewhere in the group other than the Vidalia project, including funding for Balama capital and working capital. The unrestricted cash balance at the end of the quarter was $48 million and the anticipated active anode material inventory overhang and weaker natural graphite market demand has added pressure on the company's unrestricted cash position at quarter end. Given the more challenging external market dynamic for natural graphite material impacting working capital as well as the importance of maintaining momentum on both Phases 2 and 3 Vidalia, given the demand for Active Anode Material in the downstream; it was appropriate to consider our unrestricted cash position. Recently, Syrah has been engaging with AustralianSuper regarding their convertible note position and intentions. And in conjunction with today's release, AustralianSuper has announced its intention to convert their entire outstanding convertible notes position into Syrah's shares prior to maturity and subject to shareholder approval. The Series 1 and 3 convertible notes were originally issued for AUD 55.8 million and AUD 28 million, respectively, accreting to approximately AUD 108 million in total, with capitalization of upfront establishment fees and interest to-date. The Syrah Board endorses this position rather than cash payout for conversion above 20%, which will see a shareholder vote required to approve the issue of shares at the conversion price, taking AustralianSuper to approximately 30% ownership for Syrah. To provide flexibility around an uncertain liquidity position, AustralianSuper has committed to additional convertible notes to the potential value of up to AUD 150 million in 3 equal series. The first series of this funding will be issued as soon as practical and shareholder approval sought from shareholders for issuance of the remaining 2 series in conjunction with shareholder resolutions relating to conversion of all the new and existing convertible notes as required by the Corporations Act and had an AGM expected to be held in mid-July. Notice of this AGM will include an independent expert report and the shareholder approvals are obtained. The second and third series of notes will be available at Syrah's sole discretion. The new notes are available in 3 tranches of AUD 50 million and are structured on a broadly similar basis to the Series 1 and 3 notes. There is a break fee of 1% if the note tranches are not issued and a 2% establishment fee capitalized for each tranche. The capitalized interest rate is 11%, subject to achievement of shareholder approval for both Series 5 and 6 notes and Series 1 and 3, conversion and 10.5% is cash paid. Prior to and if the shareholder vote is not successful, the coupon is 14% capitalized and 13.5% cash paid. The conversion price on the notes is the 10-day VWAP of the 10 trading days prior to the date announcement, which is $53.6 as of the 26 April, 2023. Syrah took this decision in order to increase available liquidity at our option to support both the Vidalia project's development pace and to support the Balama operation while preserving the ability to access other funding options in conjunction with the later decision on overall funding Phase 3 when funding options are fully defined and the project is ready for fit with customer support. The company feels this approach best balances short-term certainty of funding with longer term optionality. AustralianSuper have reaffirmed their long-term support for the company in recognition of the critical nature of the Balama asset and Vidalia Downstream integration through their commitment to a long-term significant shareholder in the company and provision of an additional 5-year convertible note facility. I'll now discuss Phase 3 funding for Vidalia and with the release of the Phase 3 DFS, an update on our funding approach at the present time. As noted in October last year, the company was selected for a bipartisan infrastructure ore battery materials processing and battery manufacturing grant of approximately USD 220 million from the U.S. Department of Energy to fund a significant proportion of capital costs of the Vidalia further expansion project. The DOE grant was originally expected to be closed in the June 2023 quarter, but now is being assessed in conjunction with alternative funding options. The factors under consideration are grant size compared to CapEx requirement, the ability for grant funding to sit alongside other funding in the capital stake and the various other expected conditions of the grant. In parallel to the DOE grant process, Syrah has been engaged with them on alternative funding and has recently commenced the application process for a further DOE loan of significantly higher amount than the DOE grant under the Advanced Technology Vehicles manufacturing loan program, which is the program for the current Phase 2 facility as an alternative option to support the financing of the Vidalia's further expansion project. I'll now pass you back to Shaun.

Thanks, Steve. And in conclusion, today, the opportunity ahead of the company remains tremendous, underpinned by EV growth and the quality of the Balama and Vidalia assets. In the near term, unanticipated demand volatility and the challenges of Chinese natural graphite market behavior, there are significant frustration as we drive the company towards positive operating cash flow. Below the very near-term commercial environment for Balama production is somewhat uncertain, the major opportunity of medium and long-term natural graphite anode material demand is clear. And within that, Syrah is the only major ex-China player this far progressed, both upstream and downstream. Balama remains the highest quality natural graphite asset in the world and the one that has the best potential to beat the low end of the cost curve at volume. We will develop the right operating options in light of the latest market challenges. And in the downstream of Vidalia, we are the only major ex-China integrated operator that is bringing product to market with off-take in place. The progress of Vidalia's current construction and expansion DFS, provide enormous opportunity and fundamentally differentiate the company from the competition. And we've based that on realistic market assessments and development experience. Current period of significant capital investment in volatile market conditions is not easy. And we're not alone in the impact emanating from the China market. The signs of improvement in EV growth are expected to deplete anode material inventory. And we are optimistic that the combination of market improvement, project development, optionality of funding and operating review at Balama will deliver the outcomes we need. Thanks for the participation in the call and we'll now move to Q&A.

[Operator Instructions] Your first question comes from Jon Scholtz from Macquarie.

Just a first question on the comment on moderate and production. What does that look like? Is that more what this quarter looks like? Or is it somewhere in between this and the 20,000 tonnes per month that you were sort of looking at before in terms of that cost guidance?

Thanks, Jon. Well, we have been producing so far in this quarter. And as I said, from next month, we will moderate production, awaiting price and market demand movements. And to give a sense of what that looks like is really challenging. At the moment, the short-term volatility is such that we really don't have a good read, except to say that our interaction in China and at customer sites has given us a good degree of confidence that there's not high inventory of natural graphite in the supply chain. And the challenge really lies at the depletion of finished anode material, starting to see that demand pull through. So that is the primary reason we wanted to retain readiness to produce at higher volumes. But in the short term, we're really awaiting to see what that demand profile looks like.

Okay. And then just on the DOE grant. So June 23, as you said, it's probably going to pass. Is there a new date for when that is supposed to crystallize? Or how are you looking at the time line for that grant in and around all the other financing activities?

I think as Steve outlined, we've got both the big grant on footing and an application for a DOE loan of a higher amount. And we're assessing in conjunction with the DOE, the appropriate funding options as well as looking at what the options look like for the balance of the revised CapEx. And what we're seeking to do is really bring together that funding stack, the customer commitments in line with the DFS that we released today and taken FID before the end of the year. But really, that funding decision and assessment will be probably the key driver as to the timing of that final investment decision.

Your next question comes from Alex Ren from Credit Suisse.

Congratulations on getting the dialogues DFS done. I've got a couple of questions. First one on Balama. Just obviously, marked this inventory again impacted on prices. I think Steve mentioned there were 3 improvement initiatives, but doesn't yet include an inventory like inventory expansion option. So I'm just wondering what the current discussion about expanding inventory capacity? What are the constraints? And also, could you provide maybe just a ballpark, a capital requirement figure.

It's certainly early in that process. But one of the clear constraints on our ability to run continually and hard and get the best out of the Balama operation has been inventory constraint at Balama, which is less than 10,000 tonnes. And Nacala, which is less than 10,000 as well. We've got additional availability of inventory at September for break bulk shipments. But really, the mix between those 3 and timing of shipments can provide ongoing constraint and interruption to operations. So certainly, inventory capacity expansion is one of the options that we are considering. And certainly, there's another -- there's many other operations around the world that run campaign, whether it'd be seasonal, whether it'd be related to getting the best out of their operations and do stockpile. So it is one of the options we're looking at, but it's very early in that stage. I wouldn't comment at the moment on what that capacity might look like or what capital might looks like for that.

And next one is again, just on that DOE grant, obviously, this quarter, $21 million to the door. Just wondering how many tranches are there? Is that still each tranche subject to certain conditions? So basically, the government can sort of choose to terminate the funding if they determine flow. Also on DOE, the grant was originally expected to close by June, but now being assessed with alternative funding options. Just could you give a bit more color on this? And what's actually caused this change? And is this what led to the decision of issuing 3 additional tranches of convertibles there?

I'll answer the drawdown question first. So we're operating under the terms of the loan agreement. The first drawdown was $21 million based on the expected capital spend profile of the project. And then, as I said, subsequent to quarter end, we've drawn down another $44 million, again, very consistent with a project finance transaction and the expected capital profile. So if you add those 2 things up, we've sort of drawn down $65 million out of $98 million and we'll just continue to draw down on the loan that the capital spend manifests itself over the coming months. You -- like all these sort of project finance loans, you've got to continue to make reps and warranties and be compliant and all those sorts of things. But I think 2 successful drawdowns of that amount indicate that we've embedded the processes appropriately within our business at this point in time. And then to -- and that's for Phase 2. And then obviously, for Phase 3 could be the DOE has been very supportive of us. They understand both our downstream position and the importance of Balama as well and what we can bring to that market in terms of natural graphite active anode material. And effectively, we originally applied for and were successful with the grant, which reflected that support. But now that we've actually finished the DFS and we understand the capital number, we're assessing what the best funding option is for us going forward in conjunction with the DOE.

And I think the key there is understanding the size -- the effective size of that grant post-tax compared to the CapEx requirement and understanding what conditions and ability to put other funding alongside a grant might look like compared to what we know about the DOE loan process, the ATVM loan process that we're already working through. So as per comments earlier in the call, the DOE loan application that we put in alongside the grant is for a higher amount than what would be effective from the grant. And we'll work through those processes with the DOE and understand what options may be available to us. And obviously, we're also looking at other funding options in conjunction with those the full capital amount.

So is that fair to say that, that's sort of a voluntary decision that you went to the DOE to request a change rather than changed your mind on their side?

I think it's understanding that there are options in that there are different programs within the DOE run by different people. And having a look at what the most appropriate option is for them and for us with regard to the development of the project. In your original question, you asked, did that lead to the convertible note structure and issuance today, no, the convertible note flexibility that we thought in putting those in place. It was really to deal with the combination of elements around how the market may evolve for Balama, wanting to continue our investment in Phase 3 and the early stage engineering and making sure that we have great certainty around meeting the covenants and requirements around the DOE loan operability. So it's a combination of all of those 3 things.

Yes, understood. And sorry, one last question just on the Tesla qualification time line. Could you touch on that, please? Also, I think back in December, there was a mention of AAM specification has been changed. That would be updated in the offside agreement. Could you give a bit more color on what's changed as that specification changed especially setback on the qualification process?

No, not at all. The process through 2022 was really around confirming the specification and ensuring that we could meet Tesla's requirements under that offtake. And that confirmation of final specification was achieved in December last year. And the process now for operationalizing that contract is obviously the completion of the expansion project. And the purchase commitment requires that we obviously produce at that specification from the finished facility and reach a level of production, which is pro rata consistent with the volume of the contract. So as we stand today, all is on track in terms of project execution and working as per plan with regard to the next phases of the Tesla contract.

Your next question comes from Tim [indiscernible] from UBS.

Just one on the market first. You talked to high inventories along the chain in China weighing down on prices. Have you guys got a read on when that eases like inventories, are we starting to see inventories drawdown now as EV sales pick up again?

Yes, absolutely. As I said earlier, we know that natural graphite inventories are not high. The fact that EV production and battery cell production has still continued at high levels through the last quarter demonstrates that, that inventory position is being drawn down because production has been lower. So that is visible as to when that leads to improved order profiles, that's the million-dollar question at the moment.

Yes. Yes. Cool. And then maybe just on the recoveries and I may have missed this at the start, you had 71% for the quarter. I know it's a March rebound, but could you expand on that and why we're so low?

Yes. I think as we've said, the operational interruptions caused by hitting inventory limits were not helpful. And at times in managing around those, it's not just around stopping and starting the plant but also around managing throughput through the plant. So it's not optimal operating conditions. Equally, we had some ore processing variability and some unanticipated equipment issues, not major issues. The combination of those 3 things came together to deliver a core recovery outcome in this quarter than the improving trend through last year and we're super focused on improving that and getting that back on trend. As Steve mentioned earlier with the visit from Julio, the most recent visit and the sessions with the team out on site and we know we can do it. We've had that trend running really well. What we need to do now is make sure that from a market perspective, we can also give the team a really good run at being able to produce uninterrupted as well.

Okay, cool. And maybe the last question. So on Vidalia, just refreshing myself on the DFS. Those active anode material prices, like there's a fairly wide range there. And I'm assuming those China prices like just trying to think through like what that will look like when rubber hit road for you guys is do you think you'll be selling at a premium potentially for China price? Or I mean, what do we know in terms of price discovery for Vidalia products? How can we track that maybe or is it will be premium to, I guess, Asia metals prices and the rest?

Thanks, Tim. I think the first thing I would say is that whilst as you might described it as a pretty wide range. It's a much narrower range than you'll see when you look across a lot of other projects that are out there that are seeking or planning on much, much higher prices in anode materials in that range that we've published today in the DFS. We think it's a realistic range as to where it sits against China or Asia prices, at the time that we come into production. Yes, I think as I said during the call, there's pretty intense competition. There's a lot of pressure in China at the moment, people seeking to build market share. There's a lot of discussion about whether anode producers are operating above or below selling above or below cost of production. And there's also obviously a focus on the fact that a lot of that production addition has been artificial graphite, which obviously brings with it some unwelcomed emissions intensity to the supply chain. Looking specifically at Vidalia, I think there is recognition that Vidalia provides diversification of sourcing risk. It provides localized supply. It provides an ESG or emissions intensity advantage. And there's recognition or an understanding that capital cost of projects outside China is different than inside China. And therefore, the pricing and returns need to work for the project to be built. And that's one of the key reasons that there aren't a lot of anode material facilities, merchant anode material facilities outside of China today because it's taken some time for that bifurcation of the markets between China and ex-China to develop, but I certainly think that's there now. And the overlay of the Inflation Reduction Act and the benefits available for procurement of locally processed material are incredibly important to OEMs in the U.S. as well. So I can't give you a forecast today on what prices will look like in the U.S. compared to China in a few years' time. But I think there's a strong understanding in some of the differentials that may drive differentiation in pricing.

Your next question comes from Glyn Lawcock from Barrenjoey.

Shaun, I just wanted to try and make sure I understand the business at Balama now just in terms of cash flow. I mean, obviously, you're talking about taking production down, not quantified yet by the sounds of it. But it's probably costing you $120 million to keep the lights on. And you're only going to generate a few half production; maybe $40 million to $50 million per annum. Do you think you can get the business at least to a point where at current pricing, and I appreciate things move rapidly every day. You can at least trim the business to balance the cash flow? Or is it just trying to reduce the cash burn at Balama?

Thanks, Glyn. Look, I would characterize things very differently than $120 million being required to keep the lights on the Balama. We've talked extensively about having a 15% fixed, 15% variable cost split out of Balama. I think from a fixed cost perspective, probably sit around $4 million a month of current setup. And as I've said, we're looking at how we best manage the operating cycle at Balama and ensure that we can get the best production cost or unit cost out of that operation through the campaigns that we are running until running at full capacity. So the key variable is obviously pricing and pricing has been very positive through the course of last year. I think as we said in the extensive introduction around the market, anode material probably got ahead of itself as cell production did compared to downstream demand. And that catch-up has to occur now. But ultimately, we want to make sure that we see pricing well in excess of the cost of production at the sustainable volume level. And the work that we're talking about today is, understanding that, obviously, we've got a cost reduction, a unit cost target out there of 20,000 tonnes a month between $430 and $480 a tonne. It feels in the immediate term that 20,000 tonnes of production is not available to us. So the work we're trying to do is make sure we can get that unit cost as low as possible for lower volumes and that work is not complete yet.

But I mean, if you at $4 million a month, that's, call it, $50 million a year, you need to be selling a minimum at current prices, $20,000 a month just to cover that roughly at current prices what it sounds like. And just a second question, if I can. Just in the presentation, you said the idea behind the CB was to balance short-term funding with long-term optionality. Just wondering, can you explain what that means? I mean, why not equity to the benefit of all shareholders, why the CB and not equity across the entire share registered?

Thanks, Glyn. Look, I think the high degree of uncertainty of how the immediate market conditions will play out. It was really top of mind for us. Short lead time as we've started to think about this. And it became more apparent that market conditions weren't clearing as quickly as possible. And I think what the convertible bond structure does is it provides trenching and flexibility about how much we are committed to take, whereas obviously an equity raising at any given point in time is going to risk a significant over arrays in order to provide a time line of certainty. With regard to parity for all shareholders, I would say that the shareholders have the ability to vote on the convertible notes and the structure around them. And the structure is set up in a way which provides us optionality around short-term liquidity to navigate a period. Whilst we fill out the broader funding requirements for Phase 3, which is obviously a big task in front of us and working through the DOE loan. So it was really ensuring that we have in place a backstop that gives confidence and optionality on trenching and allows us time to work through both the market conditions and preparation for the Phase 3 funding stack.

Sorry, just as a last follow-up to that response. If the shareholders vote it down, what's the next option for you? And Super also to get to vote as well in this or are they excluded from the vote? Sorry, I just didn't pick that up in the release.

All Super are excluded from the vote. And at the moment, this is the funding option that is there for shareholder assessment. It is not this and the next 3 options. So this process we're working through at the moment.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Verner for closing remarks.

Thank you very much for your attention and participation in the call today and we look forward to providing further updates in the coming months. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.