Allkem Limited (OROCF) Q2 2023 Earnings Call Transcript

Allkem Limited (OTCPK:OROCF) Q2 2023 Earnings Conference Call February 23, 2023 5:00 PM ET

Company Participants

Martin Perez de Solay - Managing Director and Chief Executive Officer

Christian Barbier - Chief Sales and Marketing Officer

Christian Cortes - Acting Chief Financial Officer

James Connolly - Chief Project Development Officer

Liam Franklyn - Head, Australian Operations

Conference Call Participants

Rahul Anand - Morgan Stanley Australia

Alex Ren - Credit Suisse

Reg Spencer - Canaccord

Thomas Hays - CLSA

Max Vickerson - Morgan Financial

Hugo Nicolaci - Goldman Sachs

David Feng - China International Capital Corporation

Glyn Lawcock - Barrenjoey

Al Harvey - JPMorgan

Operator

Good day and welcome to the Allkem Limited FY ‘23 Half Year Results Briefing. [Operator Instructions] And finally, I would like to advise all participants this call is being recorded. Thank you. I’d now like to welcome Martin Perez de Solay, Managing Director and Chief Executive Officer to begin the conference. Martin, over to you.

Martin Perez de Solay

Thank you, Gavin and welcome, everybody and thank you for joining us for Allkem Limited half year results briefing for the financial year ‘23. As usual, I will be providing an update on our business and Christian Cortes, Acting CFO, will be covering the financial results. Also joining us for the Q&A is James Connolly, our Chief Project Development Officer, assisting us in the development of our significant growth project pipeline. We also have Liam Franklyn, leading Mt. Cattlin; and Christian Barbier, Chief Sales and Marketing Officer.

In financial year ‘23, we have continued with a strong focus on safety, quality, and productivity. And our half year results demonstrate improved profitability of our existing operations and the strong demand we are seeing from customers. Amidst strong demand for lithium products, we have delivered first production at the Naraha Lithium Hydroxide plant and on then Olaroz Stage 2 to commissioning. Sal de Vida construction is well underway and James Bay is advancing with approvals received by the federal government for the ESIA. With two revenue generating operations being supplemented in the near future by Olaroz Stage 2 and a strong balance sheet, we are fully funded to complete construction of the Sal de Vida and the development of James Bay.

We also recently shared the sad news that Neil Kaplan passed away. Neil was an outstanding CFO and highly respected colleagues who dedicated more than 10 years of service to the business. We will miss him greatly and offer our deepest condolences to his wife and family. Christian Cortes has accepted the role of Acting CFO and will ensure a seamless transition of the company’s finance assumptions while the Board conducts a former search for a permanent CFO. All can remain focused on safety, productivity, and executed our committed projects, while also advancing on the next wave of growth.

Firstly, with sustainability, we continue to be recognized for our leading practices and endeavor to increase our transparency and performance across our operations. We were recently included in the Dow Jones Sustainability Indices and more recently, we were included in the 2023 addition of the S&P Global Sustainability Yearbook. This means that our Corporate Sustainability Assessment score is in the top 15% of our industry.

During the half year period, we saw our TRIFR reduced by 30%, and the Lost Time Injury Frequency Rate reduced by 33%, demonstrating our strong focus on safety. We continue to maintain regular and positive engagement within all the communities we work as our development and construction activities advance. Of particular note, with the finalization of an updated easement and participation agreement with the Olaroz Chico community, which now incorporates production from Olaroz Stage 2 and the receipt of all final approval for the expansion of Sal de Vida to 15,000 tons per annum. We continue to undertake positive stakeholder consultation with the local communities at the James Bay project.

I will now hand over to Christian Cortes to share our financial results.

Christian Barbier

Martin, I believe Christian’s phone just dropped out. Maybe you could just keep going a little bit and we’ll come back to that.

Martin Perez de Solay

Shall I move then to Slide 11? We have achieved record production at Olaroz 17% above the previous period at 7,542 tons of lithium carbonate. This was due to increased productivity, good plant performance from outstanding mechanical reliability and asset utilization. Record revenue of lithium carbonate of almost $300 million from sales of 6,852 tons, reflecting a 351% increase in revenue from the previous corresponding period largely due to average FOB pricing increasing by 290% to $43,236 per ton.

Sales volume was up by 16%. Cash cost of goods sold increased by 2% and gross margin was very favorable at 89%. Since our last quarterly update, the export and Puna credit benefits that applied to lithium chemicals production has been removed, effective from February 6. This will impact net profitability by approximately 3.25%.

Regarding Mt. Cattlin, we achieved revenue of $257 million, which includes spodumene revenue of $190 million from sales of 36,951 dry metric tons and low-grade sales of $66 million, reflecting strong customer demand. Overall, total revenue represents a 124% increase from the prior corresponding period. Results from the recent grade control-drilling program have confirmed our expectations that production will increase as mining progressively moves from the upper end of the ore body into more central cells. It is expected that the Mt Cattlin process plant will once again be operating at full capacity.

The company anticipates production for the June half will be approximately 80,000 to 90,000 tons with annual production totaling 114,000 to 124,000 tons. We are eagerly awaiting the results of our resource drilling update on the back of a result drilling extension program that was recently concluded. The third phase of exploration drilling commenced in January and is focused on the area to the southwest of the current mine to test additional targets and prospects.

Moving on to our development assets and other projects that will underpin significant growth outcome leveraging from our operations and productivity, we are focused on executing our world-class assets to firstly triple our production capacity and then expand beyond and then expand beyond that to meet growing demand. There are a number of valuable projects underway at the right stages of development, and the team is working tireless to deliver key milestones. I will go into a little more detail on each.

On Slide 15, the Olaroz expansion reached 97% completion at the end of January with the carbonation plant at 89% completion. Activities in the carbonation plants are progressing to plan and pre-commissioning works are underway. New operating staff have been recruited, have been trained in Olaroz Stage 1 ahead of first production and operations ramp-up during the June quarter.

We successfully achieved first production of lithium hydroxide in Naraha utilizing technical grade lithium carbonate from Olaroz. An outstanding achievement, proving the technology exceeded our expectations of product quality and reaching utilization rates of 85% with Freshline, Approximately 200 tons of technical-grade lithium hydroxide have been sold to third-party customers. The second product round commenced early in January with a key milestone being steady-state operations.

At Sal de Vida, construction of the first two strengths of operation ponds is 87% completion. Camp expansion activities and procurement from loan lead items continue. The EPC contract for the process plant has been awarded and detail engineering advances. We are targeting first production in mid-calendar year ‘24 with Stage 2 development to occur sequentially, which will provide an additional 30,000 tons per annum of predominantly battery-grade lithium carbonate.

At James Bay, we are advancing the project on a number of fronts with detailed engineering, 60% complete and process plant engineering 79% complete. This will allow construction to commence as soon as permits are issued. As previously advised, federal approval for ESIA was obtained and positive stakeholder consultations continued in conjunction with final approval process with the provincial government.

Once permits are secured, construction will commence and the company will update guidance for gross production. Working is ongoing with engineering construction contractors to evaluate opportunities to accelerate the construction schedule, including the use of prefabricated modules. We saw substantial drilling progress to 24% at the end of the period, and our mineral resource update is targeted by the end of the financial year.

Shall we continue with the financial before getting into the marketing, Andrew, Christian are there?

Christian Cortes

Yes. Sorry, Martin. Apologies if I have some technology issues. Good morning to everyone. I will take you through the financial results. So if we can go back to Slide 7, please. So we appreciate it.

Allkem continued to capitalize on strong market conditions through the 6-month period with record financial performance. Half-year revenue of $558 million represents a $209 million increase on first half of FY ‘22. In addition to having benefit from favorable pricing conditions, Allkem has continuously managed cost effectively with disciplined control measures in what is a challenging inflationary environment. The combination of strong pricing and cost control measures enabled Allkem to deliver a very strong EBITDAIX of $401 million and profit after tax of $219 million, representing margins of 72% and 40%, respectively.

At an operating segment, Olaroz has managed to maintain unit cash cost of sales at $4,617 per ton, largely in line with first half FY ‘22. The highly competitive cost performance at Olaroz can be attributed to record production, which has offset the impact of inflationary cost pressures. Olaroz delivered high EBITDAIX margins of 82% for the period. Mt Cattlin’s first half production was limited by fine grade mineralization and a lower grade ore with associated low recoveries. Consequently, Mt Cattlin’s unit cash cost of production increased to $902 per dry metric ton during the 6-month period. This unit cost includes the pre-stripping cost for transitioning into the two Northwest pit. Mt Cattlin delivered EBITDAX margins of 79% for the period.

Moving to the next slide. Olaroz and Mt Cattlin operations recorded combined EBITDA of approximately $450 million compared to $106 million from the first half of FY ‘22. The improved financial performance outcome was principally a result of substantial price increases for both spodumene concentrate and lithium carbonate, delivering incremental profits of approximately $366 million. The renegotiation of sales contracts, were key in delivering these price increases.

Olaroz lithium carbonate average pricing of $43,236 in the first half of FY ‘23 compared to $11,093 in the same period last year. Mt Cattlin spodumene average realized pricing of $5,136 in the first half of FY ‘23 compared to $1,186 for the prior corresponding period. Favorable pricing variance was reduced by lower spodumene concentrate sales volumes of approximately $60.1 million compared to the first half of FY ‘22, particularly arising from the fine grain mineralization and lower-grade ore production, as previously mentioned. This was largely offset by lower grade products sold from Mt Cattlin.

The increase in Mt Cattlin and Olaroz’ cost of approximately $16.7 million are largely attributable to higher selling costs linked to higher sales prices and higher Mt Cattlin’s unit cost of production, which were offset by lower spodumene concentrate sales volumes. Corporate and administration costs reflect the expanded operations of the merged Allkem Group for a full 6-month period compared to 4 months in the previous comparable period. Such costs are comparable to the prior half ended 30 June 2022. The $32 million profit elimination represents deferred profit associated with the sale of lithium carbonate to the Naraha hydroxide plant, such profits related to inventory of leasing carbonate held at Naraha balance sheet dates.

Moving to cash flow highlights in the next slide. The group experienced operating cash flow of $358 million in the first half of FY ‘23 compared to $45 million in the first half of FY ‘22, which largely mirrors the operating performance of the group. Capital expenditure, including exploration, was $195 million across Olaroz, Sal de Vida, James Bay and Mt Cattlin. Such amounts include growth CapEx for Olaroz, Sal de Vida and James Bay as well as sustaining CapEx and exploration spend of Olaroz and Mt Cattlin.

Allkem added net cash of $138 million during the 6-month period from $418 million at 30 June 2022 to $552 million at December 2022. Over the same period, cash and cash equivalents increased by $106.7 million to $770.3 million. To recap, Allkem achieved record revenues during the period of $558 million, generated strong EBITDAIX of $401 million, and a net profit after tax of $219 million. It has a robust balance sheet with net cash of $552 million, and it’s well positioned to fund the pipeline of projects.

Thank you. I will now pass you back to Martin.

Martin Perez de Solay

Thank you, Christian. And if we can now move to Slide 19 and 20 to cover the marketing, there have been lots of news and noise, but we continue to see no significant changes to the market dynamics, particularly in the longer term. As you know, EV sales and lithium pricing were strong in 2022, and forecasts were upgraded throughout the calendar year. Sales of some low-grade material and lithium carbonate by products reflected supply side tightness throughout the December half.

As expected, we did see some softening towards the end of the year in the lead up to the Chinese New Year. And now we are seeing a normal adjustment. The ending of the Chinese subsidies had a minimal impact on more significant incentives such as the purchase tax extension remains intact. We do expect new supply from various other projects to enter the market later in the calendar year, but we also expect a very robust demand. We maintain our March quarter guidance of $53,000 per ton of lithium carbonate and spodumene pricing is expected to increase by 5% on the December quarter.

The first half of the year has been very strong with record results for Allkem, which leaves us in an admirable financial position and the ability to fully self-fund our committed development projects. We will continue to focus on safety, quality, and productivity in all areas of our business as we move to triple production by Financial ‘26 to meet growing demand. As a whole, Allkem is very well positioned to take advantage of the current market dynamics, and we remain confident on continuing to deliver excellent results for our shareholders for the remainder of financial year ‘23.

I will now hand back to the operator to commence the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Rahul Anand from Morgan Stanley Australia. Your line is open.

Rahul Anand

Hi, Martin, Christian and team. Thanks for the call. Martin, first one perhaps for you, obviously, updated to that Argentinian royalty regime. I just wanted to get perhaps a bit more clarity. Obviously, the Puna credit and the export credit are now gone. Does the export duty still apply? And is that still around that 4.5% rate? And then just as a follow-up to that question, how would the first half operating costs look like if we remove the Puna credit or any other credits from that number which was around 4,521 as reported? I’ll come back with the second question.

Martin Perez de Solay

Thank you, Rahul, for your question. I will answer the first part and will let Christian Cortes with more details on the second part. Yes, the tax data duty on export continues to be applicable in Argentina at the same rate, the removement of the credit does not imply any change in the export duties. Christian, second part of the question, a little over to you.

Christian Cortes

Hi, Rahul. Thank you for your question. With regards to the impact at operating profit level, we have always treated the incentive as a reduction to our operating costs on, I guess, on a simplified basis, about half of that was reducing our cost of sales related to a portion of the subsidy and the other half was going against the export duties that we were paying. So we were effectively reflecting lower OpEx as a result of the benefit. As we articulated in the release, the benefit was approximately 4%, equivalent to the prices that we were exporting at. So if you were to take current level of pricing, which is roughly around $50,000 FOB for us, then we’re talking about reducing our profit at operating level by about $2,000. Half of that, as I said, the cost of sales, half of that with the selling costs. I think we also noted in the release when you work through, I guess, the segment you end up with about a 3.25% of reduced NPAT as a result of the removal of the benefit.

Rahul Anand

Okay, that’s very clear. Look, second question, then perhaps for Martin. Martin, we’ve seen the labor market be quite a challenge, all through COVID and then we’ve tried to catch up on some of the project builds, very small delay there for Olaroz Stage 2. But how are you seeing the ground conditions in terms of general availability of construction teams? And then also, how is that inflationary environment going to perhaps feed into some of these project builds that we have coming up in the future? How are you viewing those CapEx forecast as well?

Martin Perez de Solay

Well, on that Rahul, we are exposed to what everybody else in the industry is exposed and inflation would impact across all projects and all of our costs. Nobody is protected again start something that flows through your numbers. In terms of the impact that such inflationary adjustments would have it would depend on the type of work and the amount of progress that the projects have the case of Olaroz. We recently updated the CapEx forecast in the case of Sal de Vida CapEx forecast is about 1 year old and something similar in the case of the January project. Obviously, some long lead items, purchase orders have been placed and those costs have been locked, but most of our construction costs would be affected by that. With regards to tightness of the work in the different environments in which we are working, we have the advantage in Olaroz also having a very strong team, delivering the project there, and James can talk to it. But as we progress on the completion of Olaroz, we are moving the team to work on Sal de Vida, and we already have appointed an EPC contractor to build the Sal de Vida carbonation plants and the pumps have significantly been progressed. In the case of James Bay, key frame contracts with the contractors being achieved and un-engineered contracts are already in place, long-lead items, purchase orders have been issued. And as such, we are managing exposure to changes in costs. However, we don’t have any silver bullets there to avoid inflation. It will impact us as impacts any other project. Perhaps James can comment a bit more on this, please?

James Connolly

Specifically to your lab market concerns, yes, obviously, it’s tight out there. I would expect differences in geographies, less so in Argentina, more so in the North Americas. In terms of modeling, I don’t see it heavier in the first of all countries, Australia as well. But for the moment, we seem to have it in check in Argentina. We’re also choosing seasoned contractors to partner with. And we also have labor market obligations within the province. So we have to build capacity within both Jujuy and Catamarca, obviously. And that does offset some of the challenges we have. But yes, we are trying to manage our costs and we will keep you posted if they go above guidance. But at this time, we’re not there yet.

Rahul Anand

Perfect. That’s all for me. Thank you very much all.

Operator

Your next question comes from the line of Alex Ren of Credit Suisse. Your line is open.

Alex Ren

Good morning, Martin, James, Christian and team. I am very sorry to hear about Neil’s passing, truly just tragic to lose someone in the Allkem family. Could I please ask two questions? First one is on the latest Mt Cattlin downgrade. Is this because the recent grade control drilling identified like a theme or like a continuation of fine-grind mineralization or other reasons? And for the low-grade sales, should we expect like a similar amount in the second half as we saw in the first half? I will circle back on the second one. Thanks.

Martin Perez de Solay

Thank you very much, Alex and I will take advantage of your comment to thank all of the market for the appreciation demonstrations that we received for Neil. He was an outstanding professional and a great friend to many of us around this call. So thank you for your comments and thanks to many market players that express our condolences and we pass all of them to Neil’s family. With regards to the Mt Cattlin question, I’ll take advantage of having Liam on the line, Liam took over control of Mt Cattlin since end of last calendar year in the September quarter. I’m sorry. And he’s been conducting the grade control drilling to update results. So he can tell you a bit more on the details that we saw when we completed the great control rate for Phases 1 and 2 and how this reguidance came.

Liam Franklyn

Yes. Thanks, Martin. Thank you, Alex. The nature of the grade control drilling was really providing more definition into that Stage 2. So we have completed Stage 1 and the Stage 2 grade control drilling was the next phase to inform us of what we would be seeing for the remainder of the financial year. So it’s not necessarily a continuation of the fine grain mineralization, which was typical of the upper lens, but it was really just a confirmation of the head grades that we should expect to see in the seat of the plant, which was slightly below what the resource model is estimating. So it was just greater definition for us.

Alex Ren

So not just deviation on the recon model?

Liam Franklyn

Essentially, yes.

Alex Ren

Okay, understood. Then my second question is, I remember on the strategy day back in April 2022, like last year, there was a chart-outlining outcome planning to triple output by 2026. But since then, there has been a couple of downgrades at Cattlin and the Olaroz experienced a slight delay. Just wondering like what would be the impact on this 5-year outlook? And how confident are you to not deviate too much from this 5-year plan?

Martin Perez de Solay

Listen, thank you for your question, Alex. I think it’s a good point to remind where we are in the 5-year plan. Our current production last financial year was about 40,000 tons of product, 25% plus close to 30% coming from Cattlin then in LCE and around 13,000 tons coming from all levels. Those 40,000 tons will very quickly come another 40,000 tons of LCE with the inclusion of Olaroz Stage 2 and Sal de Vida-Olaroz Stage 2, 97% progress, and we are aiming to complete a mechanic-to-mechanical completion, commissioning and initiating the ramp-up in the second quarter of this calendar year and the plan is progressing to plan. In terms of Sal de Vida another 15,000 tons, we have reviewed the shell, and we think that in mid-2024 calendar year, we shall be bringing the 15,000 tons from Sal de Vida. So that makes an additional 40,000 tons. The remaining 40,000 tons to production will come from the James Bay project which we are currently working on the final stages of the approval. We have – when we did the marketing, the Strategy Day update, we thought that we are going to be able to initiate construction at the end of the first quarter of this year.

We are seeing a bit of delay there. We expected to have the ESIA at the provincial level, a couple of one faster, but we are taking advantage of the timing to work on improving the shading of the James Bay project. So I would tell you, short term, which is what will happen in the next two calendar years, calendar year ‘23 and calendar year ‘24. I don’t see significant variations, no significant risk for us to be able to deliver these 3x production. As you said, minority that we faced in Olaroz and we factored it into the timetable for Sal de Vida, which we initially have scheduled for the end of 2018. We now have in mid-2024. I am waiting to get the final approval from James Bay to be able to confirm the actual date for first production on James Bay. But I foresee that during calendar ‘24 based on where we are today. And again, depending on where we end up with the approvals from – at the provincial level in James Bay, we should be able to achieve distribute production. As we work on delivering on these projects, we continue to work on the second wave of projects that we presented in that calendar day that would enable to further grow production to meet the market demand between 2025 and 2030. So, again, I see ourselves in a very strong position and perhaps the only company with the ability to deliver 3x growth within the next 2 years fully funded. Executing the projects and half of that, it’s already being constructed and the other half is 60% and 79% progress in engineering. Most of the long lead items purchase orders achieved final stages of permitting. So, I think we are in a unique position to deliver that growth at low risk and high confidence.

Alex Ren

Yes, understood. Very clear. Again, sorry about Neil. Thanks, Martin and team. That’s it for me.

Martin Perez de Solay

Thank you, Alex.

Operator

Your next question comes from the line of Reg Spencer of Canaccord. Your line is open.

Reg Spencer

Thanks. Good morning guys. My first question relates to Mt Cattlin, we have all seen your updated guidance for the second half. I know your comments around your plans to continue to produce and sell some low-grade concentrate. Are you in a position to provide any kind of guidance on volumes that we might expect in the second half? And an associated question with that, given the moves in the Chinese spot market, what kind of pricing might we expect for that low-grade concentrate relative to the first half?

Martin Perez de Solay

Listen, I will forward those two questions. Thank you, Reg, for your questions. And I will forward them straight away to Christian that has the answer. Please bear in mind that we initiated the sale of this low-grade concentrate to meet our customer demand as we encounter some progress in production in the first half. So as we grow our production, Christian will be able to give you more details on this answer.

Christian Barbier

This is Christian Barbier. Thanks for your question. So look, first on the spodumene market, we see the market remaining tight. Converted customers, they are still buying every ton they can from the contracts that we have with them. And in terms of prices, we haven’t seen spot prices changing much lately and the fact that all that spodumene is feeding into the hydroxide market is a strong point for this. Sales are all contracted, and as we guided for this quarter, that we would see a continued increase in our weighted average selling price for spodumene, a 5% increase over the December quarter. Relating to your question about low grade, so as you know, our sales agreement to support our customers while we have a shipping backlog from Mt Cattlin of spodumene. The idea is and was to support them by supplying additional distribution units, well continuing to do this at the moment. And we – as we said, I think during our last call, the – we continue during this quarter, and we will continue as it’s necessary. Again, it’s a byproduct of our production. It’s a product that we can’t concentrate any further in our existing operation in Mt Cattlin. So we’re taking advantage of these high market prices to sell it. I can’t really give you more guidance for the June quarter because it really will depend on how our spodumene production goes during that quarter. We’ve lowered our guidance. So if required, we will continue to supply these additional low-grade shipments.

Reg Spencer

Understood. I guess we should just assume then that you’ll continue to produce and sell some volumes at this low grade until you don’t in other words. Alright. My next question, and maybe this is one for you as well, Christian. Just interested in your comments about future-looking prices, a lot of people are talking about which future price that’s come down a lot. There is some little bit of Chinese stock chemical prices coming down a fair way from recent highs. Have you got any comments about how reliable you think that futures price is it an indicator of forward prices? And again, part of that question would relate to – have you seen any change in behaviors from your contracted customers and how they’ve been short term versus long term?

Christian Barbier

Yes. So thanks for that question, Rich. Obviously, I’m not going to comment much on future prices. But I think it’s a really important question, especially with what we’ve seen in happening in spot prices in China lately. So look, what – in the context of what happened, you remember that around November last year, Chinese spot prices reached record levels. And it was not a surprise as Martin mentioned earlier that an adjustment would take place. And again, that’s about Chinese spot prices, which are not representative of all lithium price transactions. Yes, this Chinese New Year period in China was the perfect time to have this adjustment because of the seasonality, and that was an opportunity for buyers to change the perception. And I’m sure you realized that buyers were frustrated that lithium prices unlike other materials, has not come down. But it was also an opportunity for the industry to take advantage of the holiday break to implement maintenance schedules. And again, you probably remember the industry had been operating at over 100% capacity for probably more than 18 months. So operations were welcoming, and that all created this dynamic.

At the same time, and I think it’s important to explain really the different dynamics in the market. At the same time, a fight for market share in the EV market has happened. A price war between OEMs and that has impacted probably in an unintended manner, it has impacted consumer behavior in China because a number of people are waiting to see if prices will further decrease. There’s been, as I mentioned, the adjustment on the spot price for lithium chemicals in China. And again, that needed to happen, and I think it was a helpful thing. And the third dynamic that I think I’d like to underline is the fight for market share that is now happening at the battery maker level in China, where the market leader is aggressively trying to take market share away from its smaller competitors and using its weight to put prices down. So every player is pushing its own agenda. It’s creating a bit of a complex situation and the overall expansion has been a bit down, but fundamentals, however, are extremely positive. Market growth is very strong. Stocks at a very modest level and profitability along the supply chain and you may have seen that lately in announcements, profitability is very strong, too. So, that’s why we’re not concerned about the overall fundamentals and the future direction of prices.

Reg Spencer

Okay, Chris. Is it fair to say then that the average selling price that you guys will receive, I think you mentioned on previous calls, there is three different price indices that will feed into your contracting both in short and medium term premium for hydroxide over carbonates blown out in recent times. So, there is still very much a regional influence on your average pricing, and that should continue and arguably smooth out some of the short-term volatility.

Christian Barbier

So at the moment, so we’ve confirmed our guidance of $53,000 per ton for carbonate, excluding related parties during this current March quarter. We have a portfolio of mostly contracted sales at the moment this current quarter. It’s probably about 80-20 contracted versus spot. And we’re selling again in China, but we’re also selling in other Northeast Asian countries, namely Japan and Korea and spot in other countries as well in Europe and North America. We continue to diversify our portfolio of customers, and we will continue as our production increases with our new developments. So that gives us also – yes, the diversification of the portfolio gives us a protection against some regional trends.

Reg Spencer

Excellent.

Operator

Your next question comes from the line of Thomas Hays of CLSA. Your line is open.

Thomas Hays

Hi, Martin. My condolences for Neil, more safety for his family and friends. My first question is just again say the thought is very much on the provincial level of approval. Given it’s been 5 weeks since the quarter, I’m wondering if you can provide any additional color on how that approval process is progressing and whether there are any speed ups? Thank you.

Martin Perez de Solay

Thank you, Thomas, for the question. Listen, on the progress on the approval for James Bay. As you know, there are two approval levels. I think we covered this in the quarterly call, there is one at the federal level, which is the JAC – that approval was granted in January of this calendar year. The second approval that we need to be able to submit the permits for initiating construction is the approval at the provincial level, the provincial level is a joint project between the Cree Nation and from the Quebec provincial government. That process – It’s a very long process that requires the presentation of ESIA, which was completed of last year, a series of questions that went back and forth that was completed in December of last calendar year. That opened up the realization of a public hearing that was conducted on the 24th and 25th of January of this calendar year. The COMEX has up 30 days to collect any further inquiries to those that were presented in the public hearing. So that gives them time until the 27th of February, which is within 4 days by which the period for public consultation will end. After that, the further the provincial government will ask if there are any further remaining questions that have not been answered at the public on the 24th and 25th, may ask a further clarification on those things. And then, the final issuance of the environmental or social approval happens. This goes with the bureaucratic times of the different Canadian government of the province of Quebec, which we have suffered over the last few months, but we feel that we are very close. No surprises during the public hearings. We don’t know whether there were new questions both on the project, good reaction to the press towards the project. Now my our clients, good relationship with the Cree Community of Eastmain and good relationship with the Cree National Government as well as with the provincial authorities at this point in time, nothing tells us that we will have further delays apart from the time that it takes to put all the signatures and stop the documents. But that is the process that we have to go through.

So as I said before, we were expecting to have those approvals during January so that we could start mobilizing at the end of the March quarter and take advantage of the spring and move on quickly to the construction of the project. That doesn’t seem to be the case because it’s already in the February. It’s a bit for a month of delay from what we originally expected. And we don’t have a full certainty on how long it will take to the government to issue all of this approval. So our impression as of today, this is working very good according to the, what do you call it, the process that it has to go through, a bit slow. But moving forward, those are prices through the process, and we expect to get this approval soon. But I think as I explained in the quarterly call, it is very difficult for me to run risk on the time it takes to the government of Quebec to issued approvals. I’ve been wrong already. So I don’t want to be wrong once again. We will wait until the issue final approval, and we will tell you when we expect first production from James Bay after that. The good news is that we are taking advantage of the time to progress on the engineering and progress on the long-lead items so that we can very quickly move into construction and deliver the project once all approvals are obtained, which in insist, I expect that to be very soon.

Thomas Hays

Thank you, thanks for that. And then just a follow-up, piggybacking off for our question on ground conditions in Argentina. I’m just interested to understand the threshold requirements around the hiring local labor force to file the data, noting that Olaroz, you have about 75% of your staff from the local provincial areas?

Martin Perez de Solay

Sal de Vida has a requirement to employ 70% of the people from within the province of Catamarca. I would tell you that we don’t see that as a significant hurdle. We currently employ 75% of the people that works in Olaroz from the province of Jujuy. 35% of that – excuse me 45% of that 75% from the 10 local communities surrounding the Olaroz projects remaining 30% from the province of Jujuy. So we’ve done that in Jujuy could do it in Catamarca again. And so far, we are meeting the requirements. Yes, it’s challenging, but I think that our strong ESG work and our strong work with the communities, enables us to achieve these goals. And I did question the governor of Catamarca said, listen, I don’t think you need to enforce this. We already did this in Jujuy we will make it in Catamarca. So it’s not an issue of us not willing to do it, we think we can do it. We’re doing it in Jujuy, as I told you. So I don’t see a problem there.

Thomas Hays

Thank you very much. I will leave there.

Operator

Next question comes to the line of Max Vickerson of Morgan Financial. Your line is open.

Max Vickerson

Good morning. Can I just change tack just a little bit there and just talk about Naraha. Can you remind us in what the typical sales cycle looks like there? Do you need to build much more in terms of inventory? And how long do you think it will probably take to move through to increase sales there?

Martin Perez de Solay

Well, all of the inventory that was required to start up how was built during the last quarter. I think we disclosed that in the last quarterly results. And Christian Barbier could give you a little more detail on how long it takes for the product to go from Olaroz to reach Naraha and how that cycle works.

Christian Barbier

Yes, Max, this is Christian. Thanks for your question. The production that we have today from Naraha is technical grade hydroxide, and it’s sold on a spot basis. It will continue to be sold like that until we have a sustainable production of battery grade, which is qualified by customers. The qualification process is a lengthy process. It goes into the battery application. And we will complete this with the key customers that we are discussing long-term supply agreements with. And in the meantime, we will continue to sell hydroxide on the spot basis. There is not a lot of hydroxide transacted on a spot basis. However, because it’s a very tight market at the moment, there is actually quite a number of players who are happy to buy export quantities. Again, the growth in the market and the constrained hydroxide market make it a really good time for us to have to sell spot hydroxide.

Max Vickerson

Excellent. Thank you. If I can just ask one more then. You mentioned that one of the large players in the Chinese battery market is looking to flex its market muscle and consolidate demand and also some supplier contracts to other sounds of things. Do you see a similar move happening in some of the ex-China battery producers?

Christian Barbier

Sorry, Max, you’re saying outside China, the same happening outside China?

Max Vickerson

Yes, that’s right. Are there other larger players making moves along the similar lines...

Christian Barbier

Yes. Yes. Look, I think the dynamics are completely different outside China. And the way prices are driven by sentiment in China is very particular. In other countries, people have a more, I mean, see more stability in prices as a factor to facilitate the way they run their business. So the other thing is that spot prices in China were much higher than anywhere else in the world in the December quarter. I would say now that prices are somehow converging between Chinese spot prices, Chinese contract prices, and prices outside China.

Max Vickerson

Excellent. Okay, thank you.

Operator

Your next question comes from the line of Hugo Nicolaci from Goldman Sachs. Your line is open.

Hugo Nicolaci

Hi, Martin. Thanks for the update. And I guess just following on from that question around pricing. I appreciate you won’t give any sort of comment around future pricing. But to the extent that you are seeing kind of offtakes using the current pricing environment to kind of get prices lower. Can you give us any color around how your conversations are going ahead there on those offtakes for 4Q pricing both in terms of spodumene in Mt Cattlin and carbonate in Olaroz? And then I have a second one afterwards. Thanks.

Martin Perez de Solay

Yes, Hugo. So look, a lot of it is about the way people see the market. So one is the current sentiment that is observed in China – and again, people expected that after Chinese New Year, the sentiment would improve and customers would come back to buying very quickly. It hasn’t happened yet. However, inventories that are now at a very low level in China, and we expect in the next few weeks, customers will come back to the buying market. So I don’t want to give too much, I mean, to spend question on inventories. But a lot is being said about this. What we see is that with the level of production that there has been in China plants being shut down and people having refrained from buying over the last few weeks, the level of inventories downstream is very low. And upstream, we see the level of inventories, also – which it has increased a little bit with converters, but it’s still quite low. One of the main converters and the key customer of ours yesterday, was actually reported of having only one week of hydroxide inventory and they are going into a 2-week maintenance shutdown. So we certainly are not concerned about any of our offtake agreements. All our customers are calling the quantities as per the agreement. And again, with Mt Cattlin, with the delays that we’ve had, our customers are still concerned and they are asking us to supply as quickly as possible. Does that answer your question?

Hugo Nicolaci

Yes. No, that’s super helpful. Thanks, Martin. And maybe just a quick follow-up on that, though, just around the Mt Cattlin delay comments. How much of the kind of lower grade volume is kind of used to meet your offtake agreements at Mt Cattlin? And to the extent that production doesn’t necessarily hit your second half guidance, are there any ramifications in terms of having to meet volumes from spot or anything like that for that offtake agreement?

Martin Perez de Solay

So you’re right, first, we don’t see the possibility of not meeting this revised guidance. We’re quite confident that we will meet these figures. We’re in constant conversations with our customers, and we have agreed shipping schedules with them. And I really don’t think we will not be able to supply this. I actually want to be optimistic side that we may be able to do a bit better. As far as the low grade is concerned, look, in this current March quarter, we continue to ship. We saw during the first half of the financial year, and in December, we sold about 100,000 tons of low-grade material. We’re continuing on that trend during this current quarter. And again, during the June quarter, we will see further requirements of our customers.

Hugo Nicolaci

Great. That’s super helpful. Thanks for clarification. My last one was just a follow-up on James Bay. I appreciate you can’t control the timing of the government. But curious if anything has come out of the consultation hearings that would require additional conditions over and above the conditions set out in the prior approval. And then you touched on wanting to get construction up and running in the spring. To the extent that you see kind of further delays around timing, do you have the scope to accelerate the early construction ahead of winter? And do you see that potentially being an issue if you can’t? Thanks.

Martin Perez de Solay

Thank you on those two questions very quickly. We are not aware of anything in the public earnings that would be a program for additional conditions. With regards to the second part of your question, our initial target was to initiate construction during spring. Clearly, we don’t think that, that is going to be the case. So – and we will know the exact date at which we initiate construction when we get approval of all the permits. So that is – I can tell you when we are working on different alternatives with prefabricated models making the building for the DMS plant. I’m sharing it before winter. It all depends on the time in which we get the approval we may go one direction or another depending on that timing. But clearly, we don’t foresee a significant slip in the timing for James Bay as a consequence of these delays because we’re progressing on the projects and engineering and developing all of these alternatives.

Operator

Next question comes from the line of David Feng of China International Capital Corporation. Your line is open.

David Feng

Good morning, Martin. Thanks for taking my question. My first question is, could you just remind us how long we should expect the production ramp up of Olaroz Stage 2 would take after the first production in the June quarter. And also for Mt Cattlin, could we expect the run-rate and cash cost to fully recover to normal by, let’s say, the beginning of FY ‘24?

Martin Perez de Solay

Perfect. Thank you, Feng, for your questions. We are maintaining what we always said, an 18-month ramp-up Olaroz Stage 2. And for the time being, we are keeping that ramp-up period. With regards to Mt Cattlin, the current production guidance that we’ve given only incorporates the period until June 2023. It is the 2023 financial year. We are completing the grade control drilling on Stages 3 and 4 of the [indiscernible] that we will access during the next calendar year, and we will be able to give you more certainty on those figures once we complete that grade control drilling exactly as we just did Olaroz Stages 1 and 2 – excuse me for Stages 1 and 2 [indiscernible] one Mt Cattlin. With regards to the current production guidance for the second half of the year, 80,000 to 90,000 tons is a healthy production at actual life of mine head grade for Cattlin. As I told you, it’s good that we have this view now from the grade control drilling, and we will be able to give you more detailed guidance once we complete the grade control drilling of Phase 3 and 4.

David Feng

Okay. So another quick question, so from a market share perspective, given that we are seeing some project delays, so what is your latest outlook for Allkem’s market share be? Are we still aiming to maintain a global market share of 10%?

Martin Perez de Solay

We aim to be a strong company in the market. And yes, we aim for a 10% market share, but we don’t control the size of the market. So we only control the size of our production. And by 2025, taking over production, we will be able to be around the 2030. We are working on the projects that we will be able to further grow our production to try to maintain a similar percentage of market share. That is what we aim for.

Operator

Your next question comes from the line of Glyn Lawcock from Barrenjoey. Your line is open.

Glyn Lawcock

Martin, thanks very much. Martin, just to follow-up firstly to something Christian said, 80% contracted, I think, in the March quarter. I assume that is volume contracted in – it’s just the floating price on a lag against the indices. Is that correct?

Martin Perez de Solay

It is volume contracted. It’s floating for indexes.

Glyn Lawcock

So essentially then, with the four and the indices we’ve seen in the last 4 to 6 weeks, as we head into the June quarter, you’ll just pick up prices on a lag basis. So it’s not unreasonable with prices where they are now in the market that June quarter prices can be lower? Or is there something special that would prevent that?

Martin Perez de Solay

No. I’ll let Christian give you more details, but we are not giving any guidance for the June quarter pricing yet. We want to see how the indices move in the next few weeks. Christian, you can give more color on this.

Christian Barbier

Yes, Martin. Glyn, look, your comments are not wrong. However, yes, we have a variety of contracts and a variety of pricing formulas and different indices. If you look at these indices, they have, as I mentioned before, probably most prices have converged in a closer range. So with our pricing formula, you will not necessarily see a decrease in the resulting price. Again, that depends on which contract. And that’s far as spot prices.

Look, it’s the same. You have some spot prices. You’ve had some spot prices at $80. You’ve had some spot prices at $50. It depends on the specification of the products that you sell and at the time when you’re selling it – so I’m not really answering your question. But at the moment, we see prices or realized prices being stable, and this is why we’ve confirmed the guidance. There was a strong weighted average price we recorded in the December quarter with $63 and we expect to have the same level in the current quarter when the indices are soft. So a bit of a lag in some pricing formulas, but not in all. So that gives you a little bit more color. I probably cannot go into more detail than that.

Glyn Lawcock

No. That’s fantastic. I mean obviously running halfway through the quarter or just over, so things can change. A couple of quick ones then. Just your cash balance of $770 million, just confirm how much of that is outside Argentina but also available freely for use on James Bay and other projects? Thanks.

Martin Perez de Solay

Christian, you have that detailed number.

Christian Cortes

Hi, Glenn, thanks for your question. The majority of the cash is outside Argentina. In Argentina, we carry around $100 million at balance sheet date. And of that cash balance, most of that is effectively unrestricted. So we can fund comfortably game to say with what we have in our balance sheet currently.

Glyn Lawcock

Alright. That’s great. And then just a final question. Just, Martin, in the quarterly, just over 4 weeks ago, you said the grade control drilling has been conducted in areas of near-term production, which has confirmed the expected grade and location of ore. Four weeks ago, you were telling that you had – you knew that you were going to be mining, yet we’ve now downgraded post that. What changed in the 4-week period for the downgrade when 4 weeks ago, I thought you told us you knew what you’re going to be mining. Thanks.

Martin Perez de Solay

Yes. We were referring to short-term mining in this incorporates all of the areas that we will remaining until June 2024, and the results of the head grade of the grade control drilling show head grade that was slightly lower than the average of life of mine. That’s why we put the new guidance as the coming months, we will not see higher grades as we saw over the last calendar year. Life of head grade is returning to normal there, and that impacted a lower expected production for the last months of this financial year was higher than what we could foresee once we completed that head grade really. And I think we were very clear that we said it was very short-term mining that we have completed was only Phase 1 of the two not worth that this incorporate Phase 2 that is still the way of the ore until July or August of this calendar year.

Operator

Next question comes from the line of Al Harvey of JPMorgan. Your line is open.

Al Harvey

Hi, Martin and team. Just one last go at pricing. Are you able to comment on the average lag of your contract portfolio? Just trying to think, 3 months, 6 months, 1 month. Any kind of guide there will be helpful.

Martin Perez de Solay

Sorry, you said the average line on the project portfolio...

Al Harvey

On your contract price...

Martin Perez de Solay

Okay, eventually on the contract price portfolio, Christian, you can cover that one in more detail than I, please.

Christian Barbier

Yes. Look, like I said, we have a variety of pricing formulas. We have a variety of contracts. There always is a lag of some months. We had a lag last year, and we mentioned that the lag continues, however, like I think everyone in the industry, our prices are a little bit more reactive now. But again, the diversity from the types of pricing format, the types of indices, and the types of regions we’re selling to is dampening any strong effect that may happen. So I can’t really give you more details on that. What I’d like to add is, again, that the fundamentals we see in the market are extremely healthy. Growth in the underlying EV market, low levels of inventories in the supply chain and very strong profitability for all players in the supply chain that have been able to scale up their production. So strong fundamentals. And look, I think the short-term movements or the price adjustments that have happened lately have probably been healthy for the industry. And we don’t see that any source of concern.

Al Harvey

Right. Thank you. And I guess just slipping to James Bay. Just want to – any early wins on the resource extension there, potential timing that, that could flow through to reserve and thoughts on the potential upside capacity of the asset 320 on the last study, but where do you think that the land is following more drilling?

Martin Perez de Solay

Listen, it’s very early now. We only progress 24% on the drilling. It’s a good progress to taking advantage of the winter there to do the drilling. But very early to say anything on that. I think that we could have something towards the end of the financial year, we have to see where the results come. For the time being, it’s only drilling.

Al Harvey

Sure. And just finally, Mt Cattlin drilling resource work there? What are you thinking about in terms of potential to extend life? And have you seen similar math issues to the fine grade material that you’ve been counted or the last 6 months or so.

Martin Perez de Solay

Well, a couple of things on that. We just completed the drilling for the resource extension. We will publish with some resources towards the end of the first quarter of this year of what we’ve seen. We’re now in the laboratory testing of our close results. And in any case, it doesn’t have the accuracy of grade control drilling. So we will be able to foresee life extension of demand. But with regards to fine grade mineralization and else may take a bit longer and we will have to work better as we put forward the yearly guidance for the product. Liam, you can comment on that more than me. So please update us. Hello, Liam. Can you hear us? We lost the connection with Lima currently. So sorry, I answered that already here. So that’s thank you. So I think it’s – are there any more questions?

Operator

There are no further questions. I’d like to hand back to Martin for final comments.

Martin Perez de Solay

Well, thank you very much. And I said, we are committed to delivering scale and profitability required by our customers as the world transitions to a net zero economy. In achieving this, we must remain focused on safety, quality and productivity with strong operational performance, project execution, and excellent management of cost in this environment. Thank you all for joining our half year results briefing today. If you have any further queries, please do not hesitate to contact our Investor Relations team.

Operator

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