Allkem Limited (OTCPK:OROCF) Q1 2024 Earnings Conference Call October 25, 2023 7:00 PM ET
Company Participants
Martin Perez de Solay – Managing Director and CEO
Christian Cortes – Acting CFO
James Connolly – Chief Project Development Officer
Liam Franklyn – Head of Mt Cattlin Operations
Christian Barbier – Chief Sales and Marketing Officer
Andrew Barber – Director of Investor Relations
Conference Call Participants
Rahul Anand – Morgan Stanley
Austin Yun – Macquarie Capital
Kaan Peker – RBC
Alex Papaioanou – Citi
Mitch Ryan – Jefferies
Reg Spencer – Canaccord
Robert Stein – CLSA
Lachlan Shaw – UBS
Hugo Nicolaci – Goldman Sachs
Matthew Frydman – MST Financial
Glyn Lawcock – Barrenjoey
Operator
Good day and welcome to the Allkem Limited September Quarterly Results Briefing. [Operator Instructions] And finally, I would like to ask all participants that this call is being recorded. Thank you.
I would now like to welcome Martin Perez de Solay to begin the conference. Martin, over to you.
Martin Perez de Solay
Thank you, Gabin. Welcome, everybody, and thank you for joining us for Allkem’s September quarterly results briefing. As usual, I will be providing an update on our business; and Christian Barbier, Chief Sales and Marketing Officer, will be providing us with a market update. Also joining us for the Q&A are James Connolly, our Chief Technical Officer; and Liam Franklin, Head of Mt Cattlin Operations; and Christian Cortes, our CFO.
We’ve delivered yet another very strong quarter, particularly from an operational perspective. Mt Cattlin achieved quarterly record production and record revenue. Olaroz achieved above budget lithium carbonate production, record sales volume. We have also made solid advancements in project execution across the portfolio in line with our growth strategy.
In Argentina, we are proud to have successfully achieved the milestone of first wet production at Olaroz Stage 2, with commissioning activities currently underway. Ramp up remains — track remains on track to be completed in the next 15 months. We’re also continue to advance the construction of Sal de Vida’s Stage 1 with the first two strings of ponds complete and work now underway on the carbonation plant.
In Canada, we have advanced engineering and procurement at James Bay and commence a drilling campaign to further delineate mineralization. In Japan, Naraha has demonstrate its capability to run at 100% capacity, battery grade qualification with customers has commenced.
Looking at the portfolio, we recently updated our projects in line with current conditions and confirmed material growth underpinned by our Group Resource of 40 million tonnes of LC. We plan to also deliver 170,000 — 179,000 tonnes of LC production capacity by financial year ’28 across the assets.
Our capital development costs, operating costs and project schedule have been updated to reflect industry wide inflationary conditions and in country specific conditions. Results confirmed robust economics and the Tier 1 nature of our assets and growth portfolio.
We continue to be in a very strong financial position. This quarter we generated Group revenue of approximately $327 million. Group cash operating margins remained robust at 72%. Group net cash at the end of the quarter was approximately $671 million. We’ve continued to focus on our long-term strategy to deliver scale and product flexibility to customers and remain fully committed to the delivery and execution of our growth pipeline.
The proposed merger with Livent helps us accelerate and risk our growth profile, while driving higher vertical integration into DV [ph] value chain. We have advanced the transaction and we’re still currently targeting completion around the end of calendar year 2023. Allkem Livent have agreed that the name of the combined company will be Arcadium Lithium plc upon successful — upon a successful merger of equals.
From a sustainability perspective, and starting with safety, we recorded a 12-month moving average total recordable injury frequency rate of 2.03, slightly higher than the financial year ’23 result. Three recordable injuries occured during the quarter with one resulting in a lost time injury. Investigations have subsequently been carried out with corrective actions implemented.
Community engagement and share value projects continue across all our operations at regions in which we operate. Some highlights include a new physiotherapy room at Susques Hospital near Olaroz, following a collaborative effort with the Community and the Ministry of Health. We also continue to deliver Health and Wellbeing programs to the local communities at Sal de Vida.
Moving to our operations. At Olaroz, we achieved above budget quarterly production of 4,453 tonnes of lithium carbonate. 42% of this was battery grade, which was higher than the previous quarter in line with customer requirements. Strong operational performance continues with excellent plant reliability, low downtime and high brine feedstock concentration.
As previously stated, September quarter sales were expected to be higher, and we achieved record quarterly sales volume of over 4,400 — of over 4,500 tonnes, up 33% from the prior quarter. Sales generated a total revenue of $123 million in the quarter. Sales were completed at $25,981 per tonne on an FOB basis and cash cost of goods sold was $6,088 per tonne, up 4% quarter-on-quarter.
Gross cash margins remain robust at 77%. Cost of sales over the last year have increased due to the elimination of export incentives. The rise of material costs including soda ash, lime, labor and energy which have been impacted by inflation. However, these impacts have been in large part mitigated by improved operational performance, a brand concentration and higher recoveries.
Over time, unit cost will be offset as we progressively increase production volumes from Olaroz Stage 2 where we will focus on achieving product volumes and quality specifications over the next 15 months of the ramp up period.
At Mt Cattlin, production achieved a quarterly record with over 72,500 tonnes of spodumene concentrate produced at 5.3% lithium oxide grade. This was a 25% increase from prior quarter and in line with the financial year ’24 production forecast of 210,000 to 230,000 tonnes.
We shipped over 76,600 tonnes of spodumene concentrate, generated record quarterly revenue of $201 million at an average price of $2,625 per dmt on a CIF basis. The gross cash margin remained robust at 69% and was based on low cost of production of $636 per tonne for the quarter. Costs were lower due to higher production volumes and recoveries compared to the previous quarters.
Positively we have also received regulatory approval for the Stage 4 cutback and mining commenced in early October. At Naraha, the scheduled maintenance shutdown was complete during the quarter and plant performance demonstrated capability to run at 100% capacity. 526 tonnes of lithium hydroxide was sold, and we also commenced the battery grade hydroxide qualification process with customers.
At Sal de Vida, we have completed construction of the first two strings of ponds. The brine distribution system is complete, and the booster stations has also been commissioned. The third string of pumps is well advanced and over 63% complete. Engineering of the process plant is at 66% completion, procurement it’s at 70% and construction, it’s approximately at 13%.
After a rigorous review of our cost and schedule, we gained a better understanding of our execution plan, factoring in the ongoing input challenges and delays experienced in country and regional productivity factors. We realized our first — we released our first project updates in — since early 2022 with revised OpEx for Stage 1 and the combined Stage 1 and 2, which both remain highly competitive.
CapEx for Stage 1 and Stage 2 also increased in line with inflationary condition with Stage 2 benefiting from Stage 1. Substantial mechanical completion, pre-commissioning and commissioning activities are expected by the first half of calendar 2025 with first production expected in the second half of ’25 and ramp up expected to take 1 year.
Stage 2 construction is anticipated to commence upon receipt of applicable permit and substantial mechanical completion of Stage 1. With Stage 2 first production approximately 2.5 to 3 years thereafter. Similarly, we updated James Bay mineral resources and all reserves, project cost and project economics. This is the first update since late 2021. The total mineral resource increased by 173% from the previous estimate to 110.2 billion tonnes at 1.3% lithium oxide grade.
CapEx and OpEx have increased in line with inflationary conditions, but overall remained very competitive supporting a very attractive economic results. Engineering and procurement advanced to 84% completion by the end of the quarter with a process plant package at 87% completion.
Stakeholder and community engagement remains very positive. The IBA with the Cree’s First Nations remains in progress and has resumed after the recent State of Emergency arising from the forest fires. The environmental and social impact approval draft report was completed in September by the Quebec government personnel and submitted to Comex for review and final evaluation.
A 40,000 meters drilling campaign commenced in last — in late September, 30,000 of which will target further definition of the ore body. The remainder of the program will target possible expansions to the mineralization and newly identified targets.
We also released our first project update to Cauchari since 2019, supporting a base case of 25,000 tonnes per annum production capacity coming online in the second half of calendar year ’27. The study demonstrates the value of the project on a standalone basis.
We will see substantial opportunities to integrate this asset into Olaroz complex, and these opportunities would likely to reduce capital and operating costs. We are investigating this as part of our Olaroz Stage 3 expansion studies.
I will now hand over to Christian Barbier, who will provide us with a market update.
Christian Barbier
Thank you, Martin. Good morning, everyone. It has been an interesting past few months. The price volatility we’ve observed is a function of the relative immaturity of the industry, and the high degree of sentiments that influences pricing outcomes that come with this immaturity.
Despite strong fundamentals, and the mismatches along the uniquely owned battery supply chain as capacity grows. The lithium market balance remains fragile. Demand is growing at a pace than almost any other industry than the fraction of. Even the increase this year has been somewhat slower than expected last year, resulting in a catch up of supply.
At the same time, delays may easily move the market back into deficit. Despite expectations of a wave of lithium supply this calendar year, it has not materialized . As projects have taken longer to commission or ramp up to nameplate and longer to reach production specifications. This act is often overlooked.
Initial supplies, seldom meet battery grade specs [ph] and require further processing and that’s again undershooting surprise expectations. We believe the electrification trend remains on track. EV sales remain on course to increase 35% year-on-year to 14 million unit sales in calendar year 2023, in defiance of global macroeconomic headwinds.
China and the U.S are reaching milestones in terms of EV sales and penetration rates. And ESS performance continues to grow strongly across the globe as energy storage targets are announced or expanded. During the quarter, Allkem delivered strong sales performance, reaching record sales volume across carbonates and spodumene concentrate products demonstrating the strength and the resilience of our customer portfolio.
Production performance at Olaroz and marketing remain very strong over the quarter, which meant that our carbonate inventory didn’t drop as much as targeted. However, our order book for the December quarter is quite full already and we expect another very strong sales case. Again, during the past quarter, we’ve been able to achieve pricing above industry average, thus maximizing value for our shareholders.
It’s also worth mentioning that a significant part of sales contract is now priced subsequent to shipping date when 6 or 12 months ago or the OZ priced before shipments. This industry trend is quite widespread in China and significantly reduces the time lag of our average pricing compared with the main indices. And it will also provide more reactivity now that prices have likely bottomed out.
Thank you. I will now hand back to Martin.
Martin Perez de Solay
Thank you Christian and I will now hand back to Gabin for the — 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 and team. Good morning. Good evening and thanks for the call. Look my — perhaps one for Christian. Christian, you talked about how the industry is moving towards more China based pricing and product being priced post sale instead of presale, which was a trend 6 to 12 months ago. Can you provide a bit more color on that? I mean, does that means that you’re now having to change the pricing mechanisms on your contracted terms whereby you’re now pricing them on a provisional basis. Like we’ve seen the iron ore industry i.e., with a 1 to 2 month lag post revenue recognition. Is that the right way to think about it?
Christian Barbier
Hi. Good morning, Rahul. Thanks for your question. Look, you’re not wrong in the sense that yes, the industry practice has shifted during the course of the last few months. And it is a measure of how, in particular, cathode [ph] producers have been trying to protect, to hedge their margins, basically and align the buying price to their selling price. This has happened in China mostly, or really, probably we’ve only observed that in China.
And as far as our contracts, we continue to implement shipments as per our contract conditions. But you probably would have seen over the last couple of quarters with the increase of volume — spodumene volume that we’ve produced and shipped, we’ve diversified our customer portfolio, which actually puts us in a good position to manage our contract books as these contracts will mature. And most of these new contracts, whether they are short or longer term, use different pricing formulas. But basically they use a pricing liquidation period based on shipping or arrival and not prior to shipments and sometimes quarter prior to the shipment quarter. So, yes, it is an industry trend and we’ve observed that also on the chemical side, especially for carbonate.
Rahul Anand
Okay, perfect. That’s very clear. Thanks for that. Perhaps one for Martin. Martin, Stage 1 obviously going really strong, being helped by the Stage 2 tonnes coming in. I just wanted to understand perhaps the battery grade limits that currently exist in the plant, is there any view there to potentially increase that number or proportion at site? Or is it still being considered that the oxide purification plant is the way to go? And what’s the progress on that as well in terms of that study? Thanks.
Martin Perez de Solay
Thank you, Rahul. Quite a few questions. With regards to the percentage of battery grade, we have been operating at higher percentages. The way we define that is based on our customer requirements, so the amount of battery grade we produce at Olaroz it’s based on what our customers require. With regards to operating capacity and increasing battery grade, it shall be a significant increase in budget grade requirements from our customers as you said, oxide purification is a way to go, particularly because Stage 2 has been designed to produce 100% technical grade product to be used as a feedstock for Naraha. The customers environment technical grade products and shifting more towards battery grade if that is required.
Rahul Anand
Okay. And then in terms of the Stage 2 initial …
Martin Perez de Solay
Yes.
Rahul Anand
Sorry, go ahead.
Martin Perez de Solay
No, I was telling you and studies on purification plant continue to progress, on offsite purification, if that is required, I would be ready to do that.
Rahul Anand
Got you. Okay. And then just my final one is on Stage 2. Yes, wet production in mid July, and commissioning continuing. Is it too early for us to know whether the plant would be able to produce very close to battery grade, like we saw at the mine site visit last year? Or do we need to wait for that information once the plant is fully ramped up? Thanks.
Martin Perez de Solay
Yes, it is early to conclude that, Rahul. We want to have the plant fully ramp up the operational for some time to test the ability to produce higher quality than technical grade. I do trust that the technical improvements in the plant are very good, but we have to run it and it’s close at this point in time.
Rahul Anand
Understood. Okay. That’s all for me. Thank you very much.
Martin Perez de Solay
Thank you, Rahul.
Christian Barbier
Thank you, Rahul.
Operator
[Operator Instructions] And your next question comes from line of Austin Yun from Macquarie. Your line is open.
Austin Yun
Good morning and good evening, Martin and Chris and the team. Two questions for me, please. The first one is on Olaroz. Just wondering how much of the high-grade brine stock you have at the Olaroz? I recall that you have quite a bit during the site visit. And do you plan to use that to support Stage 1 [indiscernible] for the Stage 2 ramp up? Thank you. I will come back with a second.
Martin Perez de Solay
Thank you. Listen, it’s the brine that we have Olaroz supported both Stage 1 and Stage 2. The availability of larger evaporation area in advance of bringing Stage 2 into production has increased and enabled us to keep that higher brine concentration throughout the year and we shall see that continuing to happen.
Austin Yun
Yes, okay. Thank you. The second one is on Mt Cattlin. Just wondering if you can provide some color, I mean, really strong recovery performance. Congratulations. Should we kind of think the recovery to stay at 67%, 68% over the next couple of years? Is that in line with [indiscernible]? Thank you.
Martin Perez de Solay
Thank you for that. I will ask Liam to answer that question in more detail. Liam, please.
Liam Franklyn
Yes, no problem, Martin. So recovery has been strong this quarter. A lot of that’s influenced by the quality of ore. We’re currently in at the moment in the stage of mining. The good news is that should continue throughout the remainder of the financial year as to longer periods than that we’ve still got to process some of the information from our grade control drilling to really get a good sense of that for future years.
Austin Yun
Thank you.
Operator
Your next question comes from the line of Kaan Peker from RBC. Your line is open.
Kaan Peker
Hi, Martin and team. Two questions from me. The first one on Mt Cattlin is probably following on with the previous question, but on that can you just talk through what grades that you’re processing? Is it above reserve? And how much CapEx was spent on the asset this quarter? And I’ll follow-up with a second. Thanks.
Martin Perez de Solay
Can you — can you expand on the grade question.
Kaan Peker
The head grade this point in time is slightly ahead of reserve, but across the course of the project, it’s in line with expectations. So we’re in a good period at the moment and will do for the next 6 months, tapering off towards the end of the financial year and into the next year. And sorry, I didn’t quite catch the next question was around the capital investment. Was that right?
Kaan Peker
Yes, the amount of CapEx spend in the quarter.
Martin Perez de Solay
The CapEx spend in the quarter is going to be reasonably minimal. It’s going to increase in the next half more as we invest in infrastructure.
Christian Barbier
Martin, it’s Christian here. I can I can provide a bit more …
Martin Perez de Solay
Yes, please.
Christian Barbier
… color on the CapEx. The CapEx incurred in the quarter for Mt Cattlin, as Liam already said, it’s quite minimal. We spend less than $10 million during the quarter. Although as we make progress, in the next three quarters, that amount will increase in line with being was just kind of.
Kaan Peker
And the second question is around the cost set now at James Bay. It looks like there’s a step up in the long run costs and appears to be driven by mining dilution. Could you maybe expand or clarify that? Thanks.
Martin Perez de Solay
Yes, thank you for that, Kaan. I will ask James Connolly put together the study to answer that one.
James Connolly
Yes, I think in the next cut of our mining, our mind design, we look forward to reducing some of that dilution that you’ve seen. Obviously, we were we had a drilling update that we had recently done, and some of the opportunities with some of the smaller lenses coming through smaller pegmatites added to the dilution. So we’d be mindful that we’d be looking to maintain grades as we did historically, over the initial years of life. And if you see us manage that stockpile of that low grade material through surface stockpiles, that would be the way to go but we haven’t done the work yet. But we do look to get it back in line where it was in the previous study.
Kaan Peker
Well, thanks. I’ll pass it on. Appreciate it.
Operator
Your next question comes from the line of Alex Papaioanou from Citi. Your line is open.
Alex Papaioanou
Hi, Martin and team. Just following up on comments around the inventory and strong order book in December quarter. Are you looking to sell majority of your built inventory in December quarter? Or should we expect additional sales into the March quarter?
Martin Perez de Solay
Well, we’re continuing to progress with the sell-down of our inventory during the December quarter, and it may take part of the march quarters, we’ll be seeing a strong performance of the Olaroz production as we start to see production coming through from Olaroz Stage 2. That we’ll start to see high inventory levels. And hello says well, Christian Barbier, if you want to add something on that please.
Christian Barbier
Yes, thanks, Martin. And Alex, good morning. Look, we have reduced during the September quarter on the margin, the level of carbonate inventory, despite record sales, because we had an extraordinary performance on Stage 1 Olaroz again. And we also didn’t ship any carbonates to our Naraha plant affiliates this quarter, because they had enough inventory. So for the December quarter, to answer your question, we’ve already recorded a very high-level of sales. So volume is expected to be significantly above the September quarter. And you can expect and this is what we indicated last quarter to have the progressive adjusting of our inventory levels over a few quarters. So this remains on course.
Alex Papaioanou
Right, thanks. My second question. So with the Argentinean primary elections done, and the final upcoming? What would a renewal of the existing party mean for you? And how you operate in terms of any fiscal changes? If there’s anything to note there?
Martin Perez de Solay
It is a good question. We had primary elections last weekend, there wasn’t a winner. So we have to go to a ballot hashing in Argentina again on November 19. The two running candidates in developed hash have manifested the support for the lithium industry, the current Minister of Finance with one of the candidates and go through 7% of the votes from the official party and the challenging who is coming from a Libertarian abstract and libertarian as in the U.S diaper towards right now the European side. Both of them very supportive of the lithium industry, both of them are supportive of Argentina reaching fiscal balance and both of them have manifested their intention to continue growing in an industry that that helped the country. Nothing that has changed in terms of new fiscal terms, and particularly important to mention that the provinces in which we operate, the current governors have renewed their mandate. So we don’t foresee any change in the provinces who are the ones controlling particularly royalties and the main terms of the concessions. So not significant changes on the political front. I will tell you relatively positive despite is still a difficult environment in Argentina and we continue to see the foreign exchange restrict restriction supplying for some time on to fiscal balance if reached and the situation starts to easy out.
Alex Papaioanou
Great, thank you. I’ll pass it on.
Operator
Your next question comes from the line of Mitch Ryan of Jefferies. Your line is open.
Mitch Ryan
Good morning, Martin and team. I know that you’ve updated the pre-tax NPV for several new projects and if I go through them could share a 2.5, Sal de Vida 5.5, overall 7.1 and James by 2.9. I got a pre-tax NPV of USA saying $1 billion and obviously that excludes Mt Cattlin and Naraha. In light of that, are management comfortable with the transaction metrics remain fair and reasonable to shareholders?
Martin Perez de Solay
Thank you for your question. And I think it’s a good one. Yes, yes, we remain comfortable and the transaction being fair and reasonable for our shareholders. The transaction it’s a script, merger of equals. And we think that both parties are adding value to the merged company. As we described before, this transaction relies on three main strategic pillars. One is becoming an important supplier for our customers. This is a customer — this is a marketing in which demand would concentrate around turn of sold buyers. So you need to be a larger supplier to the industry in order to be relevant for them.
Number two, its vertical integration is key and essential. As we discussed in previous questions, the amount of budget grade product being required. The requirements of customers in terms of quality, which we are seeing in the complex product qualification processes, and the fact that the industry will continue to evolve and require particularly detail and quality, lithium molecules. Being vertically integrated is important, both parts add a lot of value into the vertical integration. Livent would put us ahead of where we are in terms of vertical integration and delivering this specialty lithium chemicals to the market. And also the growth opportunity, both companies bring a unique growth portfolio into the merged entity that will enable us to continue to grow and accelerate our ability to deliver this quality product to an a larger product portfolio to our customers.
Mitch Ryan
Thank you. Thank you very much. That’s it for me.
Operator
Your next question comes from the line of Reg Spencer of Canaccord. Your line is open.
Reg Spencer
Good morning, guys. Thanks for the opportunity to ask a question. How should we think about the inflationary impacts on consumables that you outline today? And how do those current rates or those current costs compared to the cost input estimates that you use with your recent project economic updates? Are they consistent? Are they based on any reduction in current rates for consumables? Just trying to get a feel for costs that you reported today relative to those that you put out in your updated project studies? Thanks.
Christian Barbier
Thank you, Reg. A few have seen through those updated studies, cost has been increased and that was also part of previous questions. That is a recognition of the current increase in the cost of consumables that we are seeing from the inflationary environment. And the studies not only incorporate those increases in costs, but also incorporate increases in production capacity, and improvements in efficiency and recovery rates as we see through the assets and as we continue to expand and bring them in. There’s also a temporary movement on the cost, on the Olaroz basis, because it’s impacted by the lag between inflation and devaluation in Argentina, which creates quarterly movements. When you look at it, compared to previous quarters, particularly about a year ago, there’s a significant impact from the elimination of some export incentives that were applicable to production in the [indiscernible]. And so all of that has been factored into the studies. And the studies recognize a mix of all those impacts.
Reg Spencer
Great. Thank you. Thanks, Martin. I must have missed that earlier question. Next one, you mentioned Cauchari. That has always been in the portfolio. But I suppose you’ve had so many other things going on that there hasn’t been a lot spoken about it. You outlined a potential development scenario for the project with all those recently released studies. You mentioned that it might fit into an Olaroz three expansion or just curious as to how we should think about the current Allkem growth strategy relative to what that might look like assuming the merger proceeds. There will be by the looks of things competition for capital marks various growth opportunities. Is this something that we should figure out now or perhaps this is a question for [indiscernible] assuming the merger completes?
Martin Perez de Solay
Well, listen, I’m having the discussions with Paul over time with regards to the strategy on how assets shall be developed. I think when you look at Cauchari, what we have done is updated the standalone basis study that was put together by advantage lithium and updating that study shows very strong and profitable economics. If we were to continue the project standalone, the way you should look at Cauchari is bring in Cauchari as part of an overall expansion. You will see CapEx reduction as we take advantage of existing infrastructure. And you will also see lower production costs improving the results from Cauchari. Also, when you look at it in terms of the size that you can reach from Olaroz Stage 3 expansion, bring in the brine from the Cauchari assets enables to have a larger Stage 3 expansion improving the overall economics of that project. So — and that will apply regardless of the merger with Livent. So it’s — that would improve in terms of — as you mentioned, in terms of capital availability or how do you compete for capital between the different projects of the new merged entity. This is a project that will rank up as a consequence of the improved economics from bringing into a larger and more stronger of Stage 3 expansion.
Reg Spencer
Okay. Thanks very much, Martin. I will pass it on.
Operator
Your next question comes from the line of Robert Stein of CLSA. Your line is open.
Robert Stein
Hi. Just a clarification question for something that was addressed earlier on the merger ratio. How sensitive was that merger ratio to converted margins given the converted margins at the moment? pretty anemic, I was just wondering, given that that was part of the transaction benefit that log brought to the mix. How sensitive was that ratio to that?
Martin Perez de Solay
The way the merger ratio was put together was considering the fundamental value that both companies were bringing into the table and looking into the long-term projections of values. As you can see in market volatility, we have been shift — the value shifting from the upstream to the downstream quite a few times. And there’s a lot of volatility around it when you look at it in long terms, and you calculate the fundamental value that both shareholders are bringing to the merged entity, that’s a way in which the ratio was calculated.
Robert Stein
Okay. So if there was a substantial shift in the market or your understanding of the market on a long-term basis, then that would provide grounds, then to reassess the ratio. I if there was a oversupply of converting capacity or there were changes in demand for raw material — upstream raw material?
Martin Perez de Solay
But as I said before, the ratio was defined on long-term fundamental value of both companies. So what both companies are bringing to the table? And should that change dramatically? We’ll have to see. But for the time being, we’re not foreseeing any change in measured [ph] ratio. Whatsoever, based on what we’re seeing in the market today. It’s both valuations of the companies have been equally impacted by market volatility.
Robert Stein
No problem. And sorry, just a quick one on tank meaning there?
Christian Barbier
Hello.
Robert Stein
Hello, sorry.
Martin Perez de Solay
Yes, can you repeat the word [indiscernible].
Robert Stein
Yes, yes. Just on James Bay, can you provide an update that may have been earlier on the call, but an apology if repeated the question but just on James Bay, whether there was an update to permit timing whether that is starting to creep into first or delivery.
Martin Perez de Solay
Listen, we will continue to progress on the negotiations. IBA negotiations are in the final stage. And we’re going through the final stages of approval of IBA. If you remember, we’ve said in previous calls that the forest fires start stroking in Canada and in the Eastmain region have impacted and had delayed some of the meetings at the Cree community of Eastmain. Forest fires are over now and we have regained momentum on those discussions. So we’re progressing significantly. The government of Quebec submitted to COMEX the draft for final review of the ESIA back in September, and it’s being considered by COMEX. And we expect to have resolution from both things in a relatively short period of time, takes into consideration that the Quebec Province has been challenging in terms of timing since there are no time limitations for the government to issue the approval.
Robert Stein
Thank you. I’ll pass it on.
Operator
Your next question comes from the line of Lachlan Shaw of UBS. Your line is open.
Lachlan Shaw
Yes, good morning, Martin. Thank you for taking the time and thanks for your time today. Two questions from me. So firstly, just a quick one. So costs Olaroz get over $6,000 a tonne, but the revised study is putting at about just a touch over 4,000. Can you just help me understand the bridge to get to that lower cost? Is that solely volume? Or is there also assumptions there on sort of level cost out? Thank you. I’ll come back with a second one shortly.
Martin Perez de Solay
Thank you. It’s volume increase and it’s also impact of inflation and devaluation in Argentina, starting too much over time. As I said before, the costs in this period are impacted by a larger gap in there. And James, you want to add something to that answer, please?
James Connolly
Yes, if we break it down, so Martin is right. The inflationary pressures, especially hit salaries, and that that’s a temporary measure, as we know, as Argentina goes through these macroeconomic phases. But we received — we see a reversion of that more normal situation over the next 2 years. Similarly, on market analysis around soda ash and fuel, especially natural gas that shows a reversion coming back to more normal, more normal rates. And so to answer Reg’s [ph] questions, yes, we honor exactly what we have in our budget, our guidance and actuals. That’s reflected in the technical reports. But yes, there is a transition over time back to more normal pricing, whether it’s a supply side from a reagent supplies, which we’ve seen a lot of movement on the market analysis says that. But we’re coming back to a more normal space. So for the models themselves, we think that’s more realistic.
Christian Barbier
Okay. The increase in volume is quite significant as well.
Lachlan Shaw
Yes. Good. That’s helpful. Thank you. Second question is, I guess, on the market, Christian’s comments about customer demand remaining strong and growth remaining strong, notwithstanding prices have come off, 60%, 70%. Two elements here. Firstly, are you seeing reports of supply exiting the market? And secondly, in terms of your inventory, is that now stable in terms of what you’re carrying now in front of the sales book? Or would you like to actually be carrying less inventory going forward? Thank you.
Christian Barbier
Yes. Lachlan, good morning. Thank you for your questions. There’s a lot of questions in there actually. So, in terms of market growth, as I mentioned earlier, we are heading for a 30% to 35% year-on-year growth in EV sales. So there is no question about the strength of the underlying demand. And despite some, some softness in some comments, and despite some realization, a little bit below expectations from last year, you still have in China market share of 36% in August. In the U.S., the market share was — has reached 10% now and concedes really last year. And Europe despite the difficult situation the market share is around 22% or 23%. So it’s still a lot of growth every way in every jurisdiction.
Now, what we have is a very complex supply chain and the supply and demand balance applies at every step of the supply chain from the producer to the converter to the cathode maker to the battery maker and then to the OEM, and all those the capacity that needs to grow across the supply chain, while it doesn’t grow at the same speed at every step of that supply chain. And this is why it creates some friction in some places. So we did expect and I think most of the industry expected a rebound in prices at the end — towards the end of August. That explain the market would pick up again because people normally build up inventories towards the end of the year, which is a strong period. And this did not happen. It did not happen or so because people are concerned, sentiment is down and everyone in the supply chain has been maintaining very, very low inventories.
So to your question about some production exiting wet stream meeting upstream? Yes, we’ve a current level of prices, you probably have heard that independent producers of lepidolite in China have idled their operations. They’re just playing their part as swing producers, which is a normal thing to do. Did I answer your question.
Lachlan Shaw
Yes, that’s great. Thank you. And then just the second part of that was on your inventory. So your inventory levels normal in terms of what you’d like to hold going forward? Or would you look to be again, you talk to a very strong sales book, December quarter already? Would you be looking to sort of draw that down a little bit into that strong sales book?
Martin Perez de Solay
Yes. So, look, you can expect to see inventories have dropped during the December quarter. As I mentioned, we are going down our inventories progressively and increasing ourselves progressively. So, you will certainly see a reduction of inventory during this current quarter. And as we continue to — as we continue beyond, there will, the inventory will be a measure of the overall production. So with the development of Stage 2, we will recalibrate target inventory, considering the overall production.
Lachlan Shaw
Great, that makes sense. That’s really helpful. Thank you very much and I will pass it on.
Operator
Your next question comes from the line of Hugo Nicolaci of Goldman Sachs. Your line is open.
Hugo Nicolaci
Good morning, Martin and team. Thanks for the update this morning. Good steady improvements at Mt Cattlin had more a couple of follow ups for me please, maybe starting with James Bay. Appreciate that. Maybe parts of it are out of your control in terms of getting the permitting through and government not having a timeline to hit. But can you give me some more colour on if there are any sticking points. I mean, is it purely the administrative process or there’s still some environmental or technical issues around maybe arsenic [ph] disposal or anything like that that is still being worked through. And then I’ll come back with my second one. Thanks.
Martin Perez de Solay
Listen, thank you very much for the question. And know that there are not environmental issues that we are aware of the Federal Government of Canada has issued approval back in January, with some comments on all of them were addressed properly. So we don’t expect any environmental issues from Comex, as we expect from us as we didn’t have any mail one from the federal approval. So I think at this point in time, it’s more the bureaucratic process, and going from back and forth between the Ministry of Environment and Comex and the whole thing in the process that we have during the forest fires that created some commotion around the Cree delayed meetings, and to enable us to continue to progress with the process. So things are back on track. And we hope to get that bureaucratic process completed quickly.
Hugo Nicolaci
Great, thanks so much. And then just the second one, maybe around Naraha. Just clarify maybe what volume you produced in the quarter there. And if you’re still expecting to be battery grade qualified by the end of the year? Thanks.
Christian Barbier
We started about a great qualification process during the month of July and we’re continuing with that. We initially thought that was going to take between 9 to 12 month. We’re on track of that, we are working with our customers. That involves not only the cost of manufacture, but in some cases the OEMs as well. So it’s a lengthy process. We’re on track with our expectations with regards to the volume that we sold about 500 tonnes of production of hydroxide during the quarter that that was not qualified with battery-grade because we had done another qualification process with the customers. And if you remember during the month of August, we have — we did a major shutdown of the plant and checked all of the pressure valves. All of the pressure system have to be rechecked and recalibrated according to regulations in Japan. So that took the whole month of August not a large production during this quarter in Naraha.
Hugo Nicolaci
And maybe just following on Naraha, just given the Japan government’s kind of incentives around building downstream processing capacity and potentially getting half the CapEx rebated, I mean, how are you thinking about future expansions there?
Christian Barbier
Continues to be — Japan continues to be a very attractive place. The government continues to offer rebates and we have our ability to expand that plant between 6,000 to 10,000 additional tonnes of capacity. And the government is offering rebates in other places of Japan as well. So Japan is a very interesting market for us. We have a good experience there and provide the numbers continue to be as strong as they were for Naraha Stage 2, we’ll look into that into our global portfolio of downstream capacity.
Hugo Nicolaci
All right. Thanks very much. And I will pass it on.
Operator
Your next question comes from the line of Matthew Frydman of MST Financial. Your line is open.
Matthew Frydman
Sure. Thanks. Good morning, Martin and team. Martin, I’m wondering if you can talk about what’s driving the timing around the Scheme Booklet and the Independent Expert Report. I know that previously you flagged the November timing for this game booklet, but I’m thinking that’s a little lighter than what you had hoped for probably a few months back. And it doesn’t appear to leave a lot of time for shareholders to really digest everything, particularly when you’re still hoping to complete [technical difficulty] before the end of the year. So yes, firstly, can you talk through what’s driving the timing and could that timing slip further? And secondly, how important do you think it’ll be to, I guess, conduct a further education piece with shareholders, given some of the questions on this call today, to get them comfortable with the structure of the merger? Thanks.
Martin Perez de Solay
Yes, thank you very much for that question. Regarding timing, we are aiming to complete a transaction before year end and giving shareholders enough time to digest the Scheme Booklet and the S4 [ph] document in the U.S. Both documents, Scheme Booklet and S4 are now being reviewed by the regulation authorities in Australia and in the U.S. So at this point in time, we were doing everything and we know that we have a transaction that can close before the end of the year, depend on the regulators meeting the timings, but we’re working in that direction to achieve a transaction before year-end.
Matthew Frydman
Thanks, Martin. I’m sorry. Yes, in terms of the education piece, do you expect that that will be important?
Martin Perez de Solay
I think it would be and we’re planning on the further once Scheme Booklet is released, and the S4 is released further engagement with investors to continue to discuss transaction and address all of the questions that there may be out there.
Matthew Frydman
Okay, thanks for answering the question.
Operator
Your next question comes from the line of Glyn Lawcock of Barrenjoey. Your line is open.
Glyn Lawcock
Hi, Martin. Just a little bit further on the market. If we could just get Christian maybe talk a little bit about the realization for your cabinet versus say the indices because benchmark had the FRB LatAm index averaging 40,000 for the September quarter, so it’s quite a big miss to that. And then, Christian, also offered some good insight into the market. But he sort of talked about 30% to 35% growth in EVs that’s led to inventory build in the supply chain, yet we’re seeing lepidolite producers idle production, just what’s driving the excess inventory this year? And how does you see the inventory now? Is it starting to finally come down? And when does it start to get to levels that maybe we get some support back into the price? I know, that’s a hard question, but any colour. Thanks.
Martin Perez de Solay
Thank you, Glyn. I’ll pass it on to Christian to answer the details on that one.
Christian Barbier
Hey, Glyn, thank you for your questions. Regarding the price, there’s a variety of indices that are used in the industry. Benchmark is one of them. In others and in China, for domestic China people are using some others. Certainly, those that are probably more used in pricing. The — what is driving also average price this quarter is, as I mentioned, the current use [indiscernible] use of minus one or N minus one or even fixed price for spot sales has mostly been replaced in the Chinese market by pricing at the time of delivery. So there’s some provisional pricing that we had recorded in the June quarter have been reviewed downward after delivery in the September quarter. And likewise, when the price — the market price dropped in during the month of September shipments that were made in August and early September and not yet arrived at destination or fully priced, have been marked to market at the end of September. So this is what has affected our September weighted average pricing. It shows conservatism in the way we bought prices. It also means that when the market goes up, our activity in prices will be higher.
Regarding inventory, actually really we don’t see a lot of inventory in the supply chain. We see a pretty healthy situation. So maybe I’ll give you some details because there’s a lot of information that flies around and some doesn’t make sense. So downstream cutter makers, as I mentioned earlier, have been extremely disciplined over the last six months. They don’t want to take any price risk with their stocks. Our observation is that they generally have about one week of inventory of finished products. They may have sometimes up to 2 weeks, but certainly no more. And often, they just have a few days. So cathode, no battery makers have more inventories, yes, and that that’s been recorded. But sometimes we completely ridiculous figures, the norm for battery makers is to have between 1.5 and 2 months of finished products.
We hear that some have a little bit more, but you may have seen and really bit more because they might have built up some inventory ahead of this second half of the calendar year when the season is stronger. However, you may have heard or read that CATL indicated last week, that they actually have less than 2 months, they have 65 days of inventories of finished products. And they had 92 days at the same time last year. And that’s the biggest battery maker in the world. So one of the issues for battery makers in their inventory is that not all because the trees has reached the finish factory. And that’s a frustration that OEMs have voiced.
Now upstream to miners because they don’t have a concentrator, certainly have seen the DSO [ph] becoming a non sellable product. So they have stuck at current prices, there’s no market for the DSO. African producers no need to make money. So the Chinese owners transfer profits to China or to Hong Kong. So they generally export their products, their concentrate, or the blend with DSO. We don’t see significant stockpiles there. But there may be a little bit in China. That’s all upstream. As converters, again, we mentioned the situation with cathode makers, converters who produce the finished chemicals. There have minimal inventories. And the only thing that I might say here is that there’s a couple of industry leaders that seem to have excess hydroxide, and over the last couple of months have been dumping their hydroxide in the Chinese market and maybe added to the weakness of the hydroxide. But this is a temporary issue. And structurally really we see a pretty healthy situation for inventories.
Glyn Lawcock
So that’s fantastic, Christian. So I mean, do you think now it feels like chemical prices have — it seems like they’re trending more sideways now the spodumene, I guess is caught up. Is that how you’d see the market not asking you to give a price forecast, but just your sense of how the market is now balancing?
Christian Barbier
Yes, so you’re right in saying that spodumene prices have — were lagging — the reduction in prices was lagging, the reduction in chemical weapons. And they have largely caught up that would be also my observation. We’ve seen a slight rebound of spot prices after Chinese — after the Chinese going weak. And now some stability. Yes, this is really what I can say.
Glyn Lawcock
That’s great. Thanks very much.
Christian Barbier
You’re welcome.
Operator
I would now — let’s hand the call over to Andrew Barber for questions from the webcast.
Andrew Barber
Nothing, we are just on time, but if we could take one final question from the webcast and that would be regarding DLE technologies and whether Allkem’s been working on DLE technologies in particular for all arose. what that might mean for recoveries and things like water usage, please?
Martin Perez de Solay
Thank you, Andrew for the question. Yes, we are working with DLE technologies. We’re currently piloting one technology for Olaroz and we’re looking into our ability to get good recoveries from that technology. During the next quarter, we will be — start that pilot project. And we aim from the DLE technologies, the ability to improve the recovery from the brine. At the same time, we’re looking into minimizing the consumption of fresh water. As you know, DLE technologies are quite demanding on the availability of fresh water, we don’t have enough fresh water. In Olaroz it’s not a restriction in there. But we’re looking into that balance. Also, applying it to DLE technologies may help us reduce overall production cost and mixing it with the current operation technology. So that’s what we’re looking for in Olaroz. And pilots, as I said before, are being conducted during this quarter.
Andrew Barber
Thanks, Martin. I will hand back to you for closing comments.
Martin Perez de Solay
Thank you very much. And as a conclusion, I can tell you that we’ve achieved another very strong quarter as we continue to focus on operational performance, project execution, and managing the cost through our global portfolio. In addition, we’ll continue to work to complete the merger with Livent, which will deliver higher quality and lower volatility of earnings as we — as it will decrease the risk of delivery of the significant growth profiles — profile that both companies bring together. Further information will be available with the publication of the scheme document. Thank you for joining us today. And if you have any further queries, please don’t hesitate to contact our Investor Relations Team.
Operator
This concludes today’s conference call. You may now disconnect.
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