Hi all,
For the record here is round two of the transcript on the Q3’21 earnings call - hopefully in a more palatable form.
Click the spoiler buttons to open and close each section
Company Participants
Ken Brinsden – Managing Director and Chief Executive Officer
Dale Henderson – Chief Operating Officer
Brian Lynn – Chief Financial Officer
Conference Call Participants
Andrew Bowler – Macquarie
Stuart McKinnon – The West Australian
Al Harvey – JPMorgan
Harsh Bardia – Citi
JackGabb – Bank of America
Operator
Thank you for standing by, and welcome to the Pilbara Minerals March 2021 Quarterly Investor Conference Call and Webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Ken Brinsden, Managing Director and CEO. Please go ahead.
Ken Brinsden
Thank you Amanda, and thank you, ladies and gentlemen, for joining today, whether it’s via the call or the webcast.
We much appreciate your participation and a special welcome to shareholders that are listening in.
Here in the Pilbara Minerals HQ, we have Dale Henderson, Chief Operating Officer; and Brian Lynn, Chief Financial Officer. And you will hear a bit from them during the course of the call as we backfill some of the detail that relates to the March quarterly results.
By way of introduction, I’ll offer a few opening comments and then subsequently hand over to Dale, who will talk about operations and projects, who, in turn, will hand over to Brian talking about financial aspects in respect to the quarterly and cash – cash flow, closing with a bit of market commentary, sales and some of the customer interactions to try and backfill everybody’s understanding as to what’s going on in lithium raw material supply.
As always we welcome the chance to engage in some Q&A for those on the call and look forward to being able to answer everyone’s questions.
.... see spoiler for
Well, I think, it’s fair to say that by way of introduction, we’re happy with progress in almost every regard.
There’s – the backdrop to the March quarter was one of continued improvement in demand.
That’s a theme that’s been evident for at least probably three quarters now. That results in us, in essence running the Pilgangoora site, our Plant 1 facilities at full speed pretty much the entire month of February and March, and we’ve been happy with the plant’s performance.
I’ll hand on to Dale to discuss some of that detail later on.
There’s also been a steep acceleration in spodumene pricing, albeit lagged as it relates to the chemicals price.
Quite an unusual outcome, actually, when you consider how far it’s run in the period sort of January 1st through to March 31st.
Brian is going to explain a bit more about how that interacts with respect to our sales and our cash flow.
And I will talk a little bit about where I think pricing is going in the medium term.
And as I said as a result everything at site is running pretty much at full speed now, a lot more mining being undertaken. The plant is running flat out.
And of course, we’re watching very closely the progress of the Altura plant review, engineering that’s been undertaken there, and we’ll be coming back with more views as to how we see that particular plant unfolding in the coming months.
Last thing I would say by way of introduction to the March call, it is the case that spodumene is in relatively short supply. We are getting a lot of inquiry as it relates to additional product.
And we’re obviously doing our best from a production point of view to make sure that we can to the extent as possible meet the market.
And Dale will explain a bit more about how our projects are progressing in that regard.
.....On that note, I’m going to hand over to Dale, who’s going to talk a bit more about mining, processing and projects. Thanks, Dale.
Dale Henderson
Thanks, Ken, and hello everyone.
So I’ll talk to two parts here, firstly, around operations and then move to the projects piece.
And starting with operations, really busy quarter.
In the safety space, unfortunately, we had one recordable for the quarter. Just, yes, very disappointing for the team after what have been sort of six months of a clean bill of health, so that brings our TRIFR up slight – a slight notch.
Putting safety to the side, from a production perspective, yes, our strongest quarter yet.
So, really the March quarter is probably the first quarter where the plant and the team has really been asked to stretch a flex and maximize throughput.
And so I am pleased to say, yes, the new record production for us is 78,000 tons, up 20% on the previous quarter, so really happy about that.
Stepping into the mining subset, as Ken mentioned, yes, mine movements have stepped up a bit.
We’re looking – we have been moving a bit more waste in the quarter, which has been and we will be moving more waste in subsequent quarters ahead, principally a function around catching up on a bit of waste movement from when we hit the downturn.
We proactively minimized strip ratio.
So as we move forward, we’ll be doing a little bit of catch-up on that, plus, we’ll be actually opening up the pit to meet the higher required production volumes.
So yes, a little bit of more mine movement there to happen.
Moving to processing.
Yes, good quarter for processing at 72% average lithia recovery.
We had an ore feed change at the start of the quarter, which went very well, and we’re happy about the shift in ore feed.
That’s all been going fine and as planned.
Challenges for the quarter, really the only challenge for the business, for the operations being around the tight labor market.
So yes, not really specific to us. It’s an industry challenge.
WA is busy. Mining is busy, and that pressure is across the board. It hasn’t affected our operations, but we’ve, of course, got a keen eye on that pressure.
So in a nutshell, really good quarter for production.
Credit to Simon Coyle and the team. They’ve been working really hard, and it’s great to be moving into this growth cycle for the industry.
So that sort of completes the operations update.
Moving now to projects, and I’ll speak to this in two parts.
The first, the Altura project, or Plant 2, as we’ve called it.
The progress for the quarter was really around being handed the keys after that happened late January.
And from that point, it’s been around really progressing the detailed work around the assessment of that asset, and that’s included kicking off engineering, mining studies, ops, readiness, contracts. We also, during the quarter, did a trial of ore feed from the Altura pit. We ran that through our base operation being Plant 1, and we’re really pleased to report that, that performed very well. So that gives us confidence around reagent regimes and the technical approach we’re looking to deploy around processing of the Altura pit ore.
So happy about that.
Other bits of activity for Altura included commencement of drilling down the mine boundary. So we kicked off the 9,000-meter program, 1,600 meters of which was completed by the end of the quarter.
So that’s been underway.
So yes, in a nutshell, plenty of activity working on the Altura project.
In terms of the game plan and some of the specifics around that, we’ll look to provide an update in the coming weeks on that. But yes, what I can say is plenty of activity in that space.
Moving over to (from?) Plant 2 in Altura and turning our mine to our base operation,
Plant 1; The activities in this space have been around the improvement projects, as we call it. What that is a basket of capital works for the base plant, principally around debottlenecking, with the benefit being around increasing throughput. We’re expecting 10% to 15%, some increased run time and some improvement around product moisture. That project is going well. Their contract mobilized in March, and they’re underway. And we’re expecting that to be commissioned in the September quarter.
So, looking forward to the completion of that project and the additional tonnage that, that will provide to the operation.
The other piece in the project space is around the Stage 2 expansion for our Plant 1, as we have framed it in the past. In that space, we’ve been doing some more study work, but as you can appreciate, really, the bulk of the focus has been around the Altura plant, given that’s really the first cab off the rank in terms of bringing additional tonnage from the Pilgangoora operation.
So yes, in a nutshell, project space, very, very busy.
Brent Chadwick and his team have flat out across that spread of projects and going really well.
.... So, yes, that really completes the update for ops and projects.
At this point, I’ll hand over to Brian.
Brian Lynn
Great, thanks Dale. And good afternoon, everyone. I’d probably just like to offer some comments around our shipping performance during the quarter; also, just an update on some changes in the pricing mechanisms that we’ve now achieved with our customer, which, I think, is worthy of note; just to provide some commentary as well on our cost performance; and lastly, some background on cash flow movement and cash balance at the end of the quarter.
So, starting with ship tonnes, we achieved about just over 71,000 tonnes, dry metric tonnes being shipped for the March quarter.
We were actually hoping that we would have exceeded that number.
We’re actually hoping to get above 80,000 tonnes.
But as a result, late in the quarter of a fire at the port, there were some delays in birthing of ships, and that actually resulted in one of our ships being delayed.
And unfortunately, there was about 11,000 tonnes, which we had thought we’d get out by 31 March, which actually ended up going out up going out in early April.
But still, 71,000 tonnes, is a pleasing result.
With respect to the pricing mechanism, I mentioned earlier, we have annual contract reviews with our customers, and we’ve taken the opportunity in the most recent review to relook at the pricing mechanism that were present in the offtake agreement.
So previously, under the offtake agreement, the pricing mechanisms were very much about a long look back, historically, to set the prices.
So as an example, in the worst case, if you are setting a price for a cargo in the March quarter, the price would have actually been set as the average of the June through to December half of the previous year.
So, it was quite a long look back.
And then that price would have applied for all of quarter of March.
So clearly, in a rising market, that’s quite punitive.
What we’ve actually now been able to achieve with the customer is that we now have a final price mechanism, which really is reflective of the market pricing at the time of shipment.
So we feel that’s a much better outcome for ourselves, but it’s also a better outcome for our customers because we’re all dealing in the same pricing environment from both point of view of us selling the product but also from the point of view of the customer buying the product.
What that does mean though is that we now enter into a world where we have provisional pricing.
So we need to actually enter into a sales contract and receive a letter of credit from each customer ahead of a shipment going out.
We need to actually agree on what is the provisional price, and that’s really just to allow values to be set for the letter of credit and then is an adjustment to that provisional price at the time a shipment occurs.
And we, therefore, receive either an increase or a decrease, depending on the price movement.
Now interestingly, for the March quarter, for those shipments that were provisionally priced, the provisional price was about US$410 a tonne, per tonne of spodumene concentrate. The expectation is that when all those cargoes get priced finally, which will happen during April, the average final price for those cargoes is going to be around about US$535 a tonne.
So there has clearly been a major shift in the price of spodumene concentrate, and we’re going to be getting the benefit for those March cargoes during the June quarter.
So that shift in price we estimate today will be about between, in Australian dollar terms, $5 million to $7 million because some of those prices are just being set at the moment. And the expectation would be that that $5 million to $7 million would be received from customers during the June quarter.
In respect of costs, if we can just move on to that, you would have seen that costs in U.S. dollar term was $399 a tonne, which was slightly higher than what we achieved in the previous quarter, which was $351 a tonne.
But a lot of that movement, that sort of $30 was largely a function of the Australian dollar.
So if you actually look at the Australian dollar cost per tonne, which is really what we’re incurring as a business, we averaged A$495 million a tonne in this quarter compared to A$481 a tonne.
So yes, an increase but not as significant when you remove the impact of the exchange rate.
The major reason for that increase in cost has largely been around freight rates. So we’ve seen quite a big increase in freight rates during the March quarter. In fact, we started the quarter at around about US$25 per tonne.
We ended the quarter just under US$50 a tonne.
So there was a significant increase in costs, and that has obviously had an impact on our cost outcome.
However, it’s probably worth noting that what we have seen subsequent to 31 March that those freight rates have started coming off. So I’d say today, we’re probably looking at rates in somewhere between US$35 and US$40 a tonne.
Lastly, I just thought I’d offer some comments on our cash position and the major cash flows during the quarter.
So we ended the quarter with $112 million of cash and irrevocable letter of credits, which we can draw down on with ships having left Port Hedland.
That compares to an opening cash balance of $248 million.
But I think everyone would be aware that we did a significant amount of the equity raise related to the Altura transaction last December, and that cash was obviously – while sitting there at 31 December, was obviously waiting to be spent on settling the Altura transaction, which occurred in January.
So about $150 million net of cash left our doors to settle the Altura transaction, which we obviously think is a very, very important part of our business going forward. The major – the other major cash flows were about $3.5 million of cash flow from operations. So we had sales – receipts from sales of about $37 million and operating costs of about $34 million.
So there’s a positive cash flow from the operations, and that obviously doesn’t include that provisional pricing adjustment I referred to before, which will come through in the June quarter.
We also received a prepayment from Yibin Tianyi for US$15 million. So that was an agreement we entered into with Yibin Tianyi, whereby they would help us fund some of the improvements that we’re currently undertaking on our Stage 1 plant, which are estimated at about $20 million.
And in return, they would receive some of the product that we will be – additional product that we’ll generate having undertaken those improvements. So we think, again, that was a good way of funding those improvements.
Other costs were obviously interest costs on the new facility we have with BNP and CFC were just under $2 million, corporate costs of about $3 million
and there’s also about $4 million – just under $5 million spent on CapEx, largely around waste – additional waste removal to free up part of the additional reserve that we need to access, further development work required as well as the mine site on infrastructure, some work on the integration of the two projects that we currently have and also some money spent on the tailings management facility as well.
So as I said, our closing cash balance of $112 million, but we see that with the improvement in pricing that we’re currently experiencing, the expectation for next quarter is that with higher pricing will come additional cash flow.
...... So I think that’s all the comments I wanted to offer, so I may hand back to Ken.
Ken Brinsden
Thanks, Brian. Thank you, Dale.
Some closing comments now as it relates to customers’ sales and a bit of market commentary, then we’ll hand over for Q&A.
To follow up on Brian’s discussion about provisional pricing, we’re really pleased with the engagement with customers that emerged late last year and early this year as we went through the process of annual contract review.
And one of the key targets that we were after was the changes in provisional pricing, and I’m pleased to say that the customers have been happy to engage in that regard.
I would make the point that whilst the effect of provisional and final pricing reduces the lag in the realized price of spodumene, there is still some lag. So we’ve gone from prior contracts being anywhere in the order of approximately three months lag through to potentially between three and six month lag to now a position where the lag is probably more like one to two months.
So there is still some lag. I just want to make that point because whilst our position is improved, you still need sufficient data in the chemical pricing world to facilitate the spodumene pricing world.
So there is still some lag.
But nonetheless, the trend is strong and in our favor as to project – I’m sorry, cargoes being repriced or final priced higher than the provisional price for the establishment of the letter of credit.
I hope that makes sense.
With respect to demand, very, very strong and the market is tight.
And as a result, pricing is heading in the right direction.
You’re saying that both in respect of lithium chemicals both within China and ex-China, and then more recently quite a bit of acceleration in hydroxide pricing, which has, well, especially in China lagged the carbonate price.
It looks to me like the hydroxide pricing is catching up.
And one of the more important themes that’s going on in the industry is, continued demand growth in the hydroxide.
We’re saying pretty steep growth, right in high-nickel cathode materials and hydroxide exports from China to the rest of the world, including Europe, which is a big theme.
That trade is growing very, very rapidly.
And I think that that’s got to apply well as it relates to hydroxide pricing.
But again, I’d like to the point that carbon is demand has also been very strong on the back of the lithium-ion phosphate battery phenomenon in China.
So the trend is strong very much, higher pricing environment.
And that is now being reflected in spodumene, albeit with some continued lag in the realized price at the spodumene level.
Given the demand backdrop, given where pricing is getting to, of course, that makes us think about the Plant 2 facilities and the work that’s going on there.
I can assure you that Dale and his time working as hard and as fast as I can, with a view to progressing that project.
So we’ll come back as that work is completed, which also completes in various stages, but as that – where it comes back, we will update the market and let everyone know what our short, medium and long-term intentions are.
That’s true in respect of both Plant 2 being the Altura facilities, but also in respect to Plant 1 Altura facility and what we do with that in the future.
Lastly, a quick discussion about POSCO, a very important relationship to Pilbara Minerals, and I’m pleased to decide that they – if you hadn’t already seen it, their board approved the development of the Gwangyang lithium hydroxide facilities.
The final scale has been pegged at 43,000 lithium carbonate equivalent tonnes.
The POSCO board is very, very clear in its intent. That is that they will make significant investments in battery raw materials, cathodes, nickel sulfates, cobalt sulfates, and of course now lithium and especially lithium hydroxide.
So that project is now approved from their point of view. At that – as a result that puts the ball back in Pilbara Minerals court. And we are continuing our assessments of that project with genuinely positively disposed to the development of that project. And ultimately, the supply chain that emerged is going into South Korea, but we just have more work to do as a result of the information received from POSCO.
So we will do our best to keep the marketing formed as our last round of reviews, progresses.
In close, yes, I’m really pleased with the quarter. I think the organization has worked incredibly hard in the last 12 to 18 months to make sure that we are very, very well positioned for what we always assumed was going to be the next wave of growth. I’m pleased to say that that now appears to be well and truly upon us. And I think Pilbara Minerals is in a really strong position because the team has worked incredibly hard to get us there and full credit to them for all the hard work that’s been done, both at site and at a corporate level.
...Amanda, I think that’s it from us. And we will throw it back to you now to open up the lines for Q&A.
Thank you.
(20min delay)