Thank you for standing by, and welcome to the IGO Limited June 2022 quarter webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining the call today for our June quarter results presentation. With me on the call today are Matt Dusci, our Chief Operating Officer, and Scott Steinkrug, our CFO. They will both be available during the Q&A session at the end of the call. Slide two highlights our cautionary statement and disclaimer. Of note, all currency amounts in the presentation today are in Australian dollars unless I otherwise note. I also note that the full year results that we mention through the presentation are unaudited, and we expect to release our fully audited full year results on the August 30th, 2022. Moving to slide three.
I will start by talking to safety and to note the continuing reduction in injury severity across the business and the reduction in high potential and serious potential incidents. We are minimizing harm and creating a safer place to work for our people. However, as always, there are improvements that can be made, and our team has refreshed our work program for the coming year to continue to deliver a safer work environment for all of our people. Moving to slide four. We are proud to once again present a strong set of results for the June quarter. A period in which we recorded safe and strong operational and financial performance, while also remaining focused on generating and delivering growth for the business.
Highlights for the quarter include the completion of the Western Areas transaction, which has enhanced our nickel business and will enable us to explore the opportunity to move into downstream nickel sulfate production studies, for which have already begun. At Nova, the team have done an outstanding job to once again safely deliver nickel production within guidance, while also achieving full-year cash costs better than our guidance range. Our lithium business continued to benefit from strong lithium pricing and continued production growth at Greenbushes, which has enabled the first dividend to be paid by the Lithium joint venture company, to IGO. We also highlight the progress that the Greenbushes team are continuing to make to build out production capacity and prepare the operation for future growth. At Kwinana, an important milestone was achieved with the first production of battery-grade lithium hydroxide during the quarter.
Our operating performance has delivered great financial performance with strong free cash flow and a strong balance sheet at year-end with net debt of AUD 533 million, post the Western Areas transaction. Moving to slide five, where we summarize our key financial results for the quarter. Group sales revenue was 13% higher quarter-on-quarter at AUD 278 million, predominantly due to higher nickel prices. Underlying EBITDA, which includes IGO's share of net profit from Tianqi Lithium Energy Australia, or TLEA, was also higher, driven by record earnings from Nova and a significant increase in our share of TLEA profit, which was AUD 102 million for the quarter. Offsetting this within EBITDA was approximately AUD 24 million in negative mark-to-market revaluations of investments held.
Net cash from operating activities and underlying cash flow, free cash flow were both significantly higher quarter- on- quarter as a result of record free cash flow from Nova, receipt of the first dividend of AUD 71 million from the lithium joint- venture, and the absence of income tax payments which impacted the March quarter results. As noted earlier, net debt at quarter end was AUD 533 million following the completion of the Western Areas transaction, which was funded via a new fully drawn AUD 900 million syndicated debt facility and AUD 362 million of cash. I note that we also acquired Western Areas' cash balance of AUD 94 million. Moving to slide six, where we reconcile net profit after tax for the quarter.
June quarter net profit after tax was AUD 107 million, with the primary drivers being stronger quarter-on-quarter profitability from Nova and TLEA, as noted earlier. Acquisition costs relating to the Western Areas transaction of AUD 66 million and a decrease in the value of our listed investments. Full-year unaudited net profit after tax was AUD 331 million. Moving to slide seven and a reconciliation of cash flow. As shown, the key movements during the quarter relate to the settlement of the Western Areas acquisition, but I also want to point out the positive contributions from the record free cash flow from Nova and the receipt of the first dividend from TLEA. Moving to slide eight, and a discussion on our expanded nickel portfolio. Moving to slide nine.
IGO now has a diverse and enhanced nickel-focused portfolio with projects spanning producing operations at Nova and Forrestania, an advanced development project at Cosmos, feasibility study stage projects at Silver Knight and Mount Goode, and an extensive exploration portfolio substantially all located in Western Australia. In addition, and in line with our strategy to be vertically integrated, our expanded nickel portfolio enables us to recommence downstream nickel sulfate processing studies. This work has commenced in partnership with Wyloo Metals, and we look forward to updating the market as this study progresses over the next two years. Moving to slide 10, and a more detailed review of performance at Nova, which had another great quarter. Production increased quarter- on- quarter, resulting in full-year nickel production at the upper end of our guidance range.
Cash costs were higher quarter-over-quarter as a result of higher production and off-site costs offset by higher nickel production. Despite this, cash costs for the full year were better than the lower end of our guidance range. A great result given the inflationary cost environment globally and the challenges that the team have continued to manage through a period of higher COVID incidences and absences. Moving to slide 11. Nova benefited from higher average nickel prices during the quarter, attributable to favorable hedge positions put in place in the prior quarter. The average realized nickel price was 17% higher quarter-on-quarter, resulting in strong free cash flow and AUD 209 million for the period. Turning to slide 12, where for the first time, we report on the assets acquired through the Western Areas transaction.
Given that we closed the transaction on the June 20th , just 10 days prior to the end of the financial year, the net assets and performance of Western Areas have been included in IGO's accounts from this date onwards. However, we've also taken the opportunity to report full quarterly, and where applicable, full financial year performance of these assets in this quarterly report. June quarter production at Forrestania was impacted by underground ore availability and COVID-19 related absenteeism, which impacted equipment availability and mine scheduling. Nickel production was 14% lower quarter-on-quarter at just under 2,900 tons for a full year result of just over 14,000 tons. Cash costs, which are now reported using IGO's cash cost methodology, were AUD 8.46 per payable pound of nickel for the quarter and AUD 8.02 per payable for the full year.
Turning now to slide 13, where we discuss the ongoing Cosmos project development. Key activities included the ongoing development of the shaft infrastructure, and underground support infrastructure, including power, paste plant and also aerodrome. In addition, underground development was advanced with a further 260 meters of decline development and over 1.3 km of underground capital development in the quarter. Moving to slide 14. In parallel with the Western Areas integration into IGO, we have been developing a revised project development strategy for Cosmos, which de-risks the operation and enhances overall value for IGO shareholders. The key elements to this strategy include prioritizing completion of the shaft development and infrastructure, completing more mine development prior to first production to open up multiple ore sources, and expanding the process plant capacity through to 1.1 million tonnes per annum.
As a result, and to enable these key work programs to be progressed, first concentrate production has been deferred from late 2022 to mid 2023. The engineering studies to support these changes are ongoing, and we expect to provide updated capital cost estimates to the market once the work is completed in October 2022. Moving to slide 15, where we summarize our guidance for the nickel operations for the coming year. Nova production in FY 2023 is expected to be lower relative to FY 2022, reflecting the maturity of the mine and lower grade stopes planned for the period. Cash costs are expected to be higher due to the lower production, combined with general inflationary pressures within the industry.
Nova CapEx in FY 2023 primarily relates to ongoing work carried over from FY 2022, including construction of water bore fields, aerodrome upgrade, solar farm earthworks, for the expansion of our solar farm, and a small amount of capitalized mine development. Forrestania production for FY 2023 is lower relative to FY 2022, largely due to an expected lower contribution from Flying Fox, while cash costs are in line with the prior year and CapEx is lower year on year. Upside production opportunities are currently being assessed, which may result in additional mine development expenditure, at Flying Fox and therefore an increased production contribution from Flying Fox. Moving to slide 16, where we discuss our lithium operations. Moving to slide 17. IGO's lithium investment is held through TLEA, which is a joint venture between Tianqi Lithium Corporation and IGO.
During the quarter, TLEA benefited from production growth of the Greenbushes lithium mine and the continued strength of lithium prices. As a result, IGO's share of TLEA profit reported in the IGO accounts at the EBITDA level was AUD 102 million for the June quarter, materially higher than the March quarter result of AUD 60 million. The strong cash flows generated by TLEA has enabled the payment of the first dividend to IGO, resulting in a distribution of AUD 71 million. Looking ahead, we expect further strong performance as a result of a material increase in the chemical grade spodumene transfer price, which has been reset to just under AUD 4,200 per tonne FOB for the H1 of FY 2023.
Moving to slide 18, where we summarize performance from Greenbushes on a 100% basis, noting that IGO holds a 25% indirect interest via TLEA. Notably, spodumene production was materially higher quarter-on-quarter, resulting in full year production within our guidance range. Cost of goods sold, excluding royalties, for the quarter and full year were also within our guidance range, despite higher mining costs, increased processing volumes, and higher labor costs generally within the quarter. Royalty costs of $364 per tonne for the quarter were materially higher and reflect the sustained increase in benchmark lithium prices upon which the royalties are calculated. Moving to slide 19, where on the left-hand chart, we illustrate the ramp up in chemical grade spodumene production over FY 2022, which has been enabled by several factors.
These include the commissioning and ramp up of the tailings retreatment plant, where we have seen strong improvement in recovery in the June quarter. Continued ramp up of CGP 2, which was commissioned in late FY 2021, and then improved plant availability and recovery at both CGP 1 and CGP 2. Moving to slide 20. The next phase of processing plant expansion at Greenbushes is the construction of CGP 3, chemical grade plant number 3, which was approved in March 2022. In parallel, we are developing the infrastructure necessary across the operation to support the higher production and processing rates delivered to date and to be delivered into the future. Key work programs, which progressed well during the quarter, will continue into FY 2023.
These are shown on the map on the right-hand side of the slide and include the construction of the tailings storage facility number four, TSF4, a new mine services area, expansion of the power and water supply, and several other key pieces of infrastructure. Moving to slide 21, a discussion on the Kwinana Lithium Hydroxide Refinery. As previously announced, the first battery-grade lithium hydroxide was produced from Train 1 during the quarter. This key milestone, which is the first time lithium hydroxide, battery-grade lithium hydroxide has been produced at scale in Australia, has enabled TLEA to commence the product qualification process. Train 1 is expected to continue to ramp up to nameplate over the next 18 months. In parallel, a final investment decision to recommence Train 2 will also be made during FY 2023. Moving to slide 22.
Whereas we did for our nickel operations, we detail our FY 2023 guidance for our lithium operations. At Greenbushes, IGO expects spodumene concentrate production to increase year-on-year and for cost of goods sold, excluding royalties, to be unchanged year-on-year. Capital investment at Greenbushes, including investment CapEx, sustaining CapEx, and deferred waste CapEx, is expected to be between AUD 420 million and AUD 480 million, of which the biggest contributor is the construction of CGP 3. At Kwinana, we have not guided on production and cost in this reporting period. However, we will do so once the operation has reached commercial production.
Sustaining capital expenditure for train one at Kwinana is expected to be between AUD 15 million and AUD 20 million, and CapEx for train two will be provided to the market once the outcome of the final investment decision is made. We expect that towards the end of the calendar year, the current calendar year. Moving to slide 23, where we will discuss our exploration program. However, in the interest of time, I will keep it relatively brief. Exploration remains a priority for IGO, and we continue to believe that exploration will deliver the next phase of organic growth for our business. That we have the right team, the right technology, and the right projects in place to deliver this. Moving to slide 24.
The primary drilling focus during the quarter was on our Fraser Range projects, and specifically on the Near Nova targets that we have identified in previous programs, and the majority of this has been captured in the quarterly releases. Of note, we drilled a target immediately to the south of Silver Knight in the quarter, which was based on some new interpretations by IGO. This resulted in multiple holes intersecting up to 21 meters of visible nickel and copper mineralization at the targeted position. This target remains open and sits outside the optimized shell that the existing mineral resource sits within. Although not yet material, this is exciting, and further work is planned within the September 2022 quarter. Moving to slide 25. Elsewhere, the team has been busy on multiple work programs, three of which we highlight here.
At the Kimberley Project, we progressed geophysical programs around the Sentinel target, while also progressing heritage surveys to support drilling in the coming months. At the Paterson Project, an extensive program of airborne and ground surveys have been completed, with drilling expected in the current quarter. Finally, at the Broken Hill Project, we've also completed a program of ground EM, which has identified unmapped intrusive rocks above a high-conductance EM plate, which will need follow-up work in, the coming months. Moving to slide 26. Looking ahead to FY 2023, the exploration team has a busy year ahead, which will include a body of work to better understand the prospectivity of the tenements acquired from Western Areas.
This work will be conducted as part of our broader exploration plan for FY 2023, where we have budgeted AUD 75 million in total, exploration expenditure, with key priorities being the Fraser Range, Near Nova, the Paterson, and the Kimberley projects. I also note several new projects to the portfolio, notably the Bridgetown Greenbushes Project, which is located immediately to the east of the Greenbushes mine. We believe these tenements are prospective for pegmatite-hosted lithium as well as mafic-ultramafic intrusion-hosted nickel copper PGE mineralization. Moving to slide 27, a short summary before I close and we open the lines to questions. Moving to slide 28. We are proud to have ended the 2022 financial year with another safe and strong quarter of operational and financial performance, while also maintaining our focus on growth across our business.
Our nickel business has evolved significantly with the net Western Areas transaction, enhancing our portfolio and providing new growth opportunities for the business and our people. Meanwhile, Nova continues to deliver and generate strong margins and returns for our business. Our lithium business has gone from strength to strength with a combination of higher lithium prices, expanding production at Greenbushes and delivery of a key milestone at Kwinana, setting up an exciting platform for financial performance and organic growth into the future. Financially, we remain in a robust financial position with strong cash flows, including the first dividend payments from TLEA, strong margins, and a balance sheet, which is well capitalized following the Western Areas transaction.
Finally, we are proud of our ongoing commitment to our people and our culture, and are continuing to build a workplace that can provide our team with the professional, personal, and wellbeing opportunities that will inspire them to continue to live our values. Thank you for joining us on the call this morning. We'll now hand back to the operator for questions. Thank you, operator.
Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. We will be addressing questions via the teleconference first, and if time allows, we'll address some of the questions received via the webcast. Your first question today comes from Mitch Ryan with Jefferies. Please go ahead.
Good morning, Peter and team. Thank you for taking my question. My first question is, at Kwinana, the refinery underwent a three-week shutdown in May and June. Can you just give me, I guess, some more clarity around that? How often are these shutdowns scheduled, and when's the next one, and potentially what was the exit production rate for Kwinana?
Yeah, sure. We would expect an annual shutdown of three-four weeks, and this is required for you know, key maintenance on some of the larger items like the calciner and the solvation oven, but also to do the annual inspections we need to do on the pressure vessels within the facility. We're yet to land on which particular months of the year where these will occur, but we will be identifying that in our guidance each year.
The exit production rate for the quarter?
I think there was a total of 90 tons of lithium hydroxide produced in the quarter. A lot of the momentum that we got in May was stripped out with that three-week shutdown in that followed a-
My next question is, in the footnotes, I noticed that there's a 5% volume discount for the chemical grade spodumene out of Greenbushes. To my mind, that's the first time that's been disclosed. I guess how is this applied? Is it across all offtakes? And then secondly, does that become irrelevant for the tons that are internalized into the Kwinana refinery once it's ramped up?
Say that again, Mitch, sorry.
You've disclosed that there's a 5% discount.
Yeah.
On pricing for the chemical grade spodumene, a volume discount. I just wanted to ensure that I understand how that is applied. Is it across all of the offtake agreements? Secondly, does that become irrelevant once you are starting to internalize those spodumene tons into the Kwinana refinery?
Yeah, sure. Yeah. It's a transfer price. It's a transfer formula to calculate the price at which spodumene is moved to the shareholders, which is TLEA and Albemarle. We wanted to make sure that disclosure was fulsome and to update the formula. That applies to all chemical grade spodumene. The technical grade spodumene is determined through a different pricing structure, and that's based on offtake agreements that both Tianqi and Albemarle have with ultimate end users for that technical grade spodumene. We do not have full visibility on the pricing of those.
Thank you. I've got lots more questions, but I've asked my two, so I'll pass it on. Thank you very much for your time this morning.
Great. Thanks, Mitch.
Your next question comes from Rahul Anand with Morgan Stanley. Please go ahead.
Hi, Peter and team. Thanks for the opportunity. Look, I just wanted to follow up on the volume discount, obviously, in terms of pricing for next year. I believe this was new news, so it's come in a bit lower than my forecast, at least. I was just trying to touch on sort of understanding how the mechanism works. You're obviously losing 5% of the volumes as you sell in. To Mitch's question, is there any such volume discount that's in your contracts for hydroxide perhaps that we need to know of? Also whether there is a relief for this once you start supplying to your own refinery. Was that basically this is to continue forever for mine life?
This is the current formula for the transfer pricing, which is agreed on for a three-year term, starting from approximately September 2019. That will be up for review towards the end of the current calendar year. We don't have any position or guidance on whether that will be reviewed or not, or whether it will stay in place. The main focus here is making sure that the transfer pricing formula is efficient and reflective of the market, so that we're mitigating any risk of scrutiny for the transfer price from Greenbushes to the shareholders.
That's the underlying basis for the formulation of the price. If we can't come up with a more efficient model, you could expect that pricing model for the transfer pricing to continue into the future. This only applies to the chemical grade spodumene. We think, when we think about the Kwinana refinery, that's the price that the Kwinana refinery would pay for the spodumene that it gets from Greenbushes. Any spodumene that we don't use at the Kwinana refinery within TLEA is on-sold to Tianqi. When it's on-sold to Tianqi, it gets a bump up of 2.5%. At the moment, where the majority of the chemical grade spodumene is going through to Tianqi, the net discount, if you like, is 5 - 2.5%, so a net of 2.5%.
Okay. Just one follow-up before I ask my second question.
There's no such similar.
Sorry.
There's no such similar formula on the lithium hydroxide pricing. Those are set based on a straightforward benchmark calculation.
Understood. Okay. Just one follow-up there, I guess. The three-year terms that you mentioned, what is the typical review process? I mean, if you could perhaps shed a bit of light in terms of sort of what happens at that three-year mark. I mean, I presume you have a meeting, but given the shareholdings and how they are structured at the moment, I mean, what does this review look like? Is that sort of trying to look at benchmarks and see how the product was priced over the last three years and then try to get closer to market? Or is this more related to the cost base at the asset? It's a market-based determinant. It's not a process I've personally been through before because we are new to the table, and we're not in a position to comment on what, how we think that might progress.
Perfect. Okay. Thank you for that. Look, the second question is on costs. Across the industry, obviously we've seen costs go up for the next year and I just wanted to perhaps get a bit of an understanding on where you're seeing currently the underlying inflation in terms of your operating costs, and also how you're seeing some of your CapEx estimates shape up for CGP3 and Kwinana Train 2. What is sort of the underlying rate that we should be thinking about as opposed to the headline? Thanks.
Yeah. With CGP3 in the guidance that we've provided, you know, we've attempted to apply some forward-looking escalation to that. From recollection, the projected CapEx out of the study was AUD 507 million. We've provided a range for our guidance of, I think, AUD 500 million-AUD 550 million, and that range at the top end envisages continued escalation around 7%-7.5%. That's not dissimilar to sort of the average basket of construction cost escalation that we are seeing. Obviously, some elements are escalating slower, some elements where there's a tightness of supply, whether it be materials or services, are escalating much faster.
Okay.
That would be a similar story across the operating assets. First and foremost, you know, anything related to fossil fuel inputs, which are all high, has had a negative impact, and we would expect that to continue into FY 2023.
Perfect.
Yeah.
That's really helpful. I've asked my two, so I'll pass it on perhaps to queue up again. Thanks.
Rahul, I'll just add to that as well that in our cash cost guidance then for Nova, we've actually built in cost escalations. As we've seen in financial year 2022, we're seeing that now in financial year 2023, we're at least factoring that in. So at out of the mine site, there's this grinding media that we've seen that's gone up, there's diesel prices that have gone up as well throughout FY 2022. We, I mean, we think it's prudent to factor some of that into FY 2023 as well, so it doesn't become a shock down the track.
No, understood. Yes. Thank you for that.
Your next question comes from Matt Greene with Credit Suisse. Please go ahead.
Hi. Good morning, gents.
Hi, Matt.
Just back on the... Hey, how are you doing? Just on the Greenbushes, CapEx, well, I get the whole lithium business. Firstly, Kwinana sustaining CapEx of about AUD 15 million-AUD 20 million. Is that, are you quite comfortable with that on a go-forward rate? Then secondly, just on Greenbushes, it seems about AUD 100 million or so has spilled over into FY 2023, you know, basically prior guidance. Can you give us a bit of a rough split as to how much of this new guidance is sustaining versus growth and deferred waste?
Deferred waste component order of magnitude is like somewhere in that 40-70 range. The split between the growth and the sustaining for Greenbushes, I don't have those at my fingertips. We'll have some further materials come out on Friday afternoon. We'll likely have some more detailed guidance in that. We are-
Okay, thanks.
Expecting it.
I guess just in
At the Kwinana end, AUD 15-AUD 20, that's probably a good guide on sustaining CapEx going forward for Train 1.
Great. Thanks. I guess just on CGP3, you've said previously that peak spend will be about halfway through the 2.5-year build time. Is that still the case, or is there an element of frontloading potentially going on here?
Yeah. Without sort of getting bogged down in details, that's broadly correct.
Okay. Thanks. Just my second question. I note your underlying free cash flow for the half was around AUD 130 million. I think you said previously that TLEA distributions were potentially moving to a monthly basis. Just so you... Is that 130 number what we should be working for in terms of your final dividend? Or is there potential of distributions early in this quarter that you'd consider as part of the dividend?
I'm not 100% clear on the question, Matt.
I guess just in terms of your dividend policy, the underlying free cash flow number, just based on your disclosure today, is around AUD 130 for the half.
Yeah.
You've mentioned previously that your distributions from TLEA will potentially move to a monthly basis. I guess, you know, has that happened? If so, any distributions that you've received early in the September quarter, would you consider that as part of your final dividend in August?
Yeah. Here you're talking about dividends at two levels, so dividends from TLEA and ultimately IGO dividend?
Yeah. I mean in terms of distributions from TLEA to IGO in the September quarter, would that potentially form part of your thinking for the IGO dividend?
Yeah, sure. Tackling that in a couple of bits. You know, contractually, the distribution frequency from TLEA is quarterly and we have not made any changes to that. You know, all things being equal, we would expect another distribution probably towards the end of the current quarter, in September. We would, you know, the board would look at the overall cash requirements of the business, cash on bank and the operating performance for FY 2022 and coming to a conclusion on the final dividend for FY 2022. You know, we'll be able to update the market on that in August.
Okay. Thanks, Peter.
Your next question comes from Hayden Bairstow with Macquarie. Please go ahead.
Yeah, morning, Pete. Just a couple from me. Firstly, just on Cosmos and pushing the sort of start back to the middle of next year. You just talk about the sort of development rates, and is there anything that's sort of been slower than what you thought? Or is this literally you wanna get further ahead on the development and scoping before you turn this thing on and sort of ramp it up, or I guess, start it at a faster rate? Just keen to understand what the process was there.
I think at a high level, you know, the strategy as previously envisaged, you know, the focus was getting to concentrate production as quick as possible, and then to continue developing the mine while operating the mill. The problem with that is that there would've been insufficient working areas available underground, and therefore, the mill would've been drip fed rather than fully fed. Therefore, the economics of that would've been not optimal. You know, we think the more optimal outcome is to spend more time in the development phase, get more working areas developed, allow the current shaft construction the timeline to be completed, and obviate any need for truck haulage of ore to surface, which was originally envisaged.
Because that just gets a bit messy with, you know, mobilization, demob of extra trucks and then the cost of doing that. We think the current plan makes a lot more sense and will deliver a more resilient operation and a better overall outcome for IGO shareholders.
Okay, great. On Greenbushes, just keen to understand, I mean, you've got to ramp this mining rate up to sort of nine million tons a year of ore. I mean, obviously with a fair bit of stripping ahead of that, I presume. I know some data put out in the Tianqi IPO docs. Are you happy with what they've provided? Or are we gonna see better guidance on how you're gonna deal with that? Are you able to sort of capitalize most of that, so your cash costs for the ramp-up period won't change all that much?
We're happy with the level of the or the quality of the disclosure in the Tianqi prospectus document. You know, that's reflective of what the plan is. As we said a little bit earlier to one of the other questions, you know, we've got a bump up in capitalized stripping in FY 2023. That'll be in that range, AUD 40 million-AUD 70 million during the year. That will contribute to cash costs for the current production staying within the guided range.
Okay, great. Thanks, Pete.
Your next question comes from Daniel Morgan with IGO. Please go ahead.
Congrats, Dan.
I must have filled in the form wrong. Sorry, Barrenjoey. You can make me an offer. Just on this transfer pricing mechanism, am I correct in my understanding that TLEA gets this volume at a 5% discount, and then you onsold it at 2.5%, which kind of implies the effective read-through discount is 2.5% from an IGO shareholder's perspective. Is that right?
Correct.
The WA state royalties, do they take account of this 5% discount for volume, or is this something that just shareholders waive? Also, is the ATO comfortable with this arrangement?
The state royalty is calculated with a slightly different formula. There's again three reference prices used. There are three different reference prices, and that results in a higher average quarterly price on which the state government royalty is based on. There's always been that disconnect. At a point in time when all the reference prices come to equilibrium, one would expect that disconnect to disappear. I'm not able to comment on the ATO's view of the transfer pricing.
I know that there is carryover tons again this quarter, which, you know, will attract the lower price. Would this magnitude of carryover occur if the, you know, if the lithium price was falling? I'm just trying to think, you know, is this another element of transfer pricing, you know, potential profits out of the business to JV partners rather than for the benefit of IGO shareholders? Thank you.
It's more of a business as usual outcome. You know, ships are loaded, ships leave port, and you know, there's a point in time when the pricing of the shipment is set. In the future, if we had a different scenario with a quarter-on-quarter price change for the spodumene, where the following quarter was lower, then that delayed shipment would attract the higher price from the prior quarter. Ultimately, it all washes out. I don't think we should get too bogged down on those individual shipments which at quarter ends.
Ultimately similar to what we do in our Nova Business, you know, we would look to a more efficient mechanism, where those shipments that are loaded and/or effectively priced at the prior quarter but occur in the following quarter from a sales point of view. We'd like to tidy that up and have some sort of pre-sales mechanism that just buries that in the previous quarter.
Okay. Thank you very much. I'll go back in the queue. Cheers.
Your next question comes from Levi Spry with UBS. Please go ahead.
Good day. Good morning. Thanks for the call.
Hey, Levi.
Lots of questions on price. I might come back to that in a second, but just at Kwinana, 18 months ramp up, how do we think about the declaration of commercial production along that trajectory? What is the critical path? How do we model it?
We would expect to get to there some time between now and Christmas.
Okay.
To continue the ramp up through calendar 2023.
Yeah. Levi, that's largely dictated by continuous runs, just ensuring that we're getting continuous runs through the circuit.
Okay, great. Thank you. Thanks, Matt. Maybe just a different part of the spodumene price realization. What was the technical grade realized price for that quarter?
I don't have the numbers sitting in front of me, Levi. It should be a fairly simple arithmetic.
Yep.
Determination.
I can do it. Sure. Yep, thanks. How does it work though? Do you literally find out after the event?
No, we're seeing the numbers in real time.
Okay. We can't guide to it. Yep. Okay.
Yeah. Well, I think we stated in the quarterly it's commercially in confidence.
Yep.
It's a matter that we are not allowed to talk about it.
Roger. Okay. Thank you. Thanks.
Your next question comes from Lyndon Fagan with J.P. Morgan. Please go ahead.
Thanks. I just wanted to ask about the Greenbushes CapEx guidance, so up to AUD 480 million. Are you able to provide a bit of a split on how much of that is pre-strip versus other items, and whether we should expect this sort of rate to continue into FY 2024 and beyond?
I think we've already answered that question, Lyndon. We said it was somewhere the range for the deferred waste would be AUD 40 million-AUD 70 million. Yes, over the next couple of years, you know, we've got increasing mining volume with increased stripping to be able to get to the point where we can sustain an ore production rate of, you know, plus minus 10 million tons per annum. So we would expect deferred stripping to continue over that period.
Thanks. I guess just going back to your three indices that you average for the lithium price realization. I noticed one of them isn't Platts, and that's a good $1,000-$1,200 higher than the Asian Metal price. I'm just kind of wondering whether the new discussions are likely to sort of negotiate to include Platts, 'cause it sort of looks like you're leaving some money on the table there.
You know, I think your comments are noted. I would expect that that would be certainly one of the points of any discussion around a determination of a more efficient pricing mechanism. I think we've done chemical grade pricing discussions to death on this call. Perhaps we move on to anything else from the quarterly.
Well, I'll just hit you with one more on price, if that's all right. The Asian Metal indices CIF, but you're averaging FOB prices. What sort of shipping cost should we be using to sort of calculate the average price at our end, to net that off?
Lyndon, the figure we use is about $25 a ton to go from a CIF price down to an FOB price.
Okay. That's great. That's all I had. Thanks, guys.
Your next question comes from Kaan Peker with Royal Bank of Canada. Please go ahead.
Hi, Peter and team. Two quick ones from me. Just with the tailings-free treatment plant, given that it involves reclamation and processing, not conventional mining, how do you expect that to impact aggregate costs when TLEA ramps up?
Yeah. Overall, you know, we expect it to be cost neutral to slightly cost beneficial to average chemical grade production costs.
I assume that would be in guidance currently?
Correct.
Cool. With chemical grade spodumene production that's sold, I know it's priced on a SC6 basis. Does Greenbushes produce different grade chemical spod? Is it consistent?
The chemical grade spot is all SC6 and consistent, and that's the delivery spec that's required by the two customers, which is TLEA and Albemarle.
There's no 6.8 or 5.5 that's being produced this year?
No. It's a high-grade ore body and that is very amenable to producing SC6, and therefore we do. Other ore bodies which are lower grade find that it's much more difficult to achieve that sort of concentrate grade, so ultimately produce a lower spec. A lower spec then attracts higher transport costs overall, has a more negative impact on carbon footprint and presents some challenges, potentially reducing throughput at the calcination stage downstream.
Sure. Thanks. That's it. I'll jump back in line, please.
Your next question comes from Kate McCutcheon with Citi. Please go ahead.
Hi, Peter and team. Hey, I have a Nova question this morning.
Good.
The copper price assumptions in your guidance, $5.65 a pound, if I'm reading that correctly, imply a pickup in spot that's now at $4.80. Are you comfortable with those assumptions? Is that a risk, perhaps?
I look at, say, it might be a slight risk. I certainly mathematically then if you have a look at the calculations, but we've provided a range here, number one. Number two, we've provided, as I said, some good flex in here for inflation pressures. This is a number that we saw at a point in time when we pulled this together and it was a number that's a blended number for the whole year.
Yeah.
Rather than try to take a speculative view on what price is going to be from year to year, we do use a formulaic approach with a blend of spot price on the day we fix it and consensus estimates for the coming year. We apply that same formula routinely, year from one year to the next.
Yeah. Okay. Can I just follow on from Levi's question around Kwinana. Commercial production this half, I think you said between now and Christmas. What will happen to the product before it's qualified? Are you able to sell that into the spot market? Secondly, you exited this quarter with 88 tons. What does the ramp-up look like over the next 18 months?
We've got a couple of curves that we will show in our presentation on Friday afternoon. That'll give you a little bit more clarity on that rather than me trying to figuratively describe it on the conference call. If you needed urgently something in the meantime, you could draw a straight line between today and that future date.
Okay. The product sales before hydroxide qualified?
We would expect to sell those into the spot market, and we would do that on a consignment or batch basis with a spec that's been certified by TLEA.
Yeah. Just to confirm, does qualification and commercial production need to happen concurrently or it seems like you're saying commercial production can be declared before you've undergone product qualification?
Correct.
Is that correct?
That's correct.
Okay. Okay. Thank you. I'll see you all soon.
Yep.
Your next question comes from David Radclyffe with Global Mining Research. Please go ahead.
Hi. Good morning, Peter and team. I've got a question on the nickel concentrate marketing strategy now you own the Western Areas' assets. How do you approach this going forward as the existing contracts roll off? Do you think that the scale could give you further upside to payabilities as a block? Then sort of historically downstream sort of studies have been a good bargaining chip in negotiations. Do you actually think that you've now got the scale to make this work? And if so, what sort of volumes of sulfate are you thinking of?
Yeah. Hey, Dave, it's Matt here. In terms of strategy and offtake, both 50% of Nova concentrate, nickel concentrate comes off at the end of December. That's aligned to when Forrestania concentrates also become available to the market. We're working through that strategy in terms of approach that will start to kick off in its H2 , the start of the H2 of this calendar year. The idea there is ultimately to look at how we extract more value through integration of both of those concentrates. That value propositioning also drives back through to recoveries into cost structures, et cetera, as Forrestania. In terms of the nickel sulfate, committed on that nickel sulfate, started test work on Cosmos now.
The idea is to get sufficient scale to make that facility economic. Looking around about 24,000 tons of nickel metal, as a first train to get the right volumes to ensure you've got enough capital efficiencies.
Okay, thanks. Maybe as a follow-up nickel question. At Cosmos, does that deferral result in a larger ore stockpile being built? I seem to remember in the past there was some talk about potentially shipping some ore pre-concentrate production. Is that still an option for you guys?
Yeah, that wouldn't be an option for us. We would always look at the value-add proposition. That's what we're trying to do.
Okay. No plans or you're not guiding to that yet?
No.
All right. Thank you. I'll pass it on.
Your next question comes from Mitch Ryan with Jefferies. Please go ahead.
Thank you very much for taking a second question. Peter, I'm just trying to reconcile your question, your commentary with regards to the ramp-up of the Kwinana refinery. You've sort of said take a straight line over the next 18 months. However, last quarter, you sort of said that you expected it to reach 50% capacity quite quickly. I think I'd taken that the 50% was when you would reach commercialization, and then it would ramp up to a 100% more slowly beyond that. Can you help me reconcile those two comments to make sure I've got my understanding correct?
Yeah. Both are broadly correct, Mitch. Like I said in answering Kate, you know, we're gonna have a chart showing ramp-up profiles with the strategy materials we put out on Friday. The straight line was probably too conservative, yes. Thanks for the pickup.
Okay. Thank you. Sorry, jumping around on you, but Cosmos clearly deferred timing and increased CapEx, but it also comes with increased throughput. Just wondering if you can provide any commentary on the impact on either recoveries or operating costs you would expect from that increased capacity.
Yeah, Mitch, we're doing all of that work at the moment to lock down that plan, and we'll come out with all of that as part of our October quarter, including updated capital as we work through that, value-adds proposition.
Okay. Thank you.
Thank you. That is all the time we have for questions today. I'll now hand the conference back to Mr. Bradford for closing remarks.
Thanks, everyone, for joining us on the call today. We really appreciate your presentation and continuing interest in the company. We look forward to re-engaging again in a month with our fully audited FY 2022 operating and financial results. In the meantime, stay safe and have a great day. Bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.