Syrah Resources Limited

Thank you for standing by and welcome to the CSIRO Resources Limited Q1 quarterly results update call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Sean Verner, Managing Director and CEO. Please go ahead.

Thanks very much. Good morning and thank you for joining the call today. With me on the call are Stephen Wells, our Chief Financial Officer, and Veer Nahira, our GM of Investor Relations and Business Development. The March 2023 quarter has seen strong progress on the downstream expansion project construction and the further expansion project DFS released today. But the recent development of volatile market conditions facing Valama has created further challenge in reaching positive operating cash flow. The quarter and the period ahead encapsulate everything that's unique about the development graphite and anode position in the lithium-ion battery supply chain. Enormous opportunity, rapid learning and the need to adapt short-term actions within longer-term strategy. Amidst the positives of lower freight rates and increased shipping availability, the short-term natural graphite market situation has weakened as somewhat slower momentum in year-on-year EV growth has fed through to lower than anticipated sales volumes. Pressure on price from inventory across the supply chain has resulted in lower production and sales and too high a C1 cost. On the other hand, The ever-growing downstream opportunity is highlighted by a continuing extraordinary battery manufacturing capacity build-out from the US and strong market and government support for Syrah's AAM capacity expansion, providing an increasingly positive market position for Syrah as an ex-China anode supplier. The short term is dominated by a China supply chain exhibiting challenging commercial behaviour, as incumbents and new entrants drive for anode market share through natural and synthetic graphite procurement and production. Accordingly, we've taken steps to strengthen the company's balance sheet to be well prepared for any further potential natural graphite market volatility, whilst ensuring project construction and development momentum in the US are maintained as we head toward a final investment decision for the next phase of Bardalia's developments. We'll divert a little today from our standard quarterly structure and cover three main areas. Firstly, a more detailed look at the natural graphite market conditions and the immediate challenges in front of us, both in navigating the situation commercially and how we think about Belama's operating methodology to best deal with dynamic volume requirements and unit cost reduction when demand is lower. Secondly, the progress and exciting future for our Vardalia operation and project development, looking at the DFS release for the Vardalia further expansion project to take the next step in growth and diversify our business towards the downstream. And thirdly, outlining our near-term cash position and how we intend to navigate funding requirements to provide the best optionality in line with expected milestones with the support of Australian Super, our largest shareholder. These three elements combine to chart the path to a final investment decision for Vardalia as customer and funding arrangements are finalised, and that's anticipated before the end of the 2023 calendar year. So turning first to the market, and we'll look at slides seven and eight of today's presentation pack. As noted during the last quarterly update, visibility of China's natural graphite demand and anode production was poor in the early part of the first quarter, impacted by both the COVID-19 reopening and Chinese New Year holidays. Uncertainty continued and market volatility increased during the quarter and since quarter end. Analysis of the major drivers of natural graphite demand and pricing demonstrates the leading indicators of EV sales, and anode material production, whilst growing strongly year-on-year, weakens considerably quarter-on-quarter in the March 2023 quarter. And the year-on-year growth rate at 32%, while still strong, was lower than the full rate of 64% last year. Battery cell production growth rates in China have outpaced consumption. An analysis demonstrates that even with some higher scrapping rates due to new production quality, apparent cell inventory grew through the latter part of 2022, leading to a slowing of delivery requirements and spot market liquidity for anode material and natural graphite so far in 2023. This is not unique to anode material and graphite, as the significant spot price declines in other battery materials such as cobalt and lithium show, the difference, of course, being higher prices earlier in some of those other markets. Anode material production increased 94% year-on-year in 2022, and similar to cell production, outpaced EV demand growth, which led to apparent inventory build-up towards the end of 2022, with the gap visible in the top left chart on slide 8. Anode material production fell around 23% quarter-on-quarter between the Dec 22 and March 23 quarters. Over the past two years, the two major Chinese anode material producers have seen five times and two times volume growth and 20% to 30% decline in margins. Domestic competition in China is hurting even the strongest producers as it expands, and new domestic entrants are under significant pressure since they seek market share. Anode material margins decreased for the top six producers in China last year, five of the top six producers in China last year, and they were flat for the sixth. Chinese artificial graphite anode production capacity growth has been stronger than natural growth over the past two years. Given both the lack of growth in domestic natural graphite mine supply and the constraints on delivery from Syrah during that same period due to shipping, Natural graphite processing capacity utilisation has lagged somewhat, with the anode material demand gap being filled by high emissions, power-intense artificial graphite products. As that capacity expanded, inventory built, and this has seen intense Chinese domestic price competition for market share in artificial graphite, with prices falling faster than declines in the key costs of artificial graphite anode production. Needle coke power costs and the resultant rapidisation costs in China have declined and are back at or below 2020 levels, falling 50% from their peak. Whilst in the ex-China markets for battery cells, our experience shows that there's little flexibility for short-term cost-based switching between anode material types, the Chinese domestic cell production market may have a higher tolerance and though both constrained natural graphite supply and a decrease in the cost of artificial graphite anode have been in place, some switching appears to have occurred in the short term. In conjunction with overall inventory levels across the anode market, this may have contributed to weaker near-term demand for natural graphite anode products. Spherical graphite processing capacity in... For natural graphite anode material in China, which is largely independent of integrated mine supply, has expanded in recent years and additional capacity in natural graphite anode material production is under construction today, which bodes well for future import demand for siren. The Chinese natural graphite anode supply chain remains disaggregated with separation of entities between mining, beneficiating order concentrate, processing spherical graphite and producing anode. And whilst there are some integrated projects, many are reliant on upstream third-party sourcing of natural graphite domestically and on import, and that's primarily from CSIRO. Domestic production of natural graphite in China is seasonal, with mining closures during the northern winter. And that can be seen in the top right chart on slide eight. Historically, this has led to consumers building stock through the year and supply being very tight through winter with increased prices. especially as anode material became a larger demand segment. Over the 2022-23 northern winter, this supply tightness appears not to have occurred due to a combination of the anode inventory impacts mentioned earlier, spherical production capacity outages during the COVID reopening, and due to a shorter and warmer winter outage period than normal. As the first quarter of 2021 23 evolved and China reopened, downward pricing pressure built over the period of the year when pricing has historically almost always increased. And this wasn't fully evident until recent weeks as spot market liquidity had been relatively low. On a positive note, despite the significant increase in natural graphite demand driven by EV market growth, overall Chinese domestic mine supply for natural graphite has not increased meaningfully over the past three years. And Syrah is the primary balancing market tonnage in China as demand has grown. This can be seen by the price increase when the market's in a net import position, which is shown in the bottom right chart on slide nine. On slide eight, sorry. In addition, product grade and particle size distribution position Syrah's Belama product strongly for anode material production, particularly when power and reagent costs are high. and environmental restrictions are apparent. And as demand continues to grow, SARA's importance and position on the cost curve and higher utilizations is extraordinarily valuable. The near-term reality now apparent in April is that inventory overhang in cell and anode production has been more significant than anticipated. And as late Q1 and April have evolved, sales volumes have lagged and deferred. Price bids have declined recently and current inventory will see SARA communicate a position of moderating production where purchase bids fall below a level that would support basket pricing above cost of production at sustainable volumes. So in summary, bringing that position together, a number of factors are impacting us in the short term. EV sales growth, while still strong, has slowed pace year on year and quarter on quarter. Anode material inventory built up through 2022 has consequently taken longer to clear. Anode material producers have been able to secure cheaper graphitization costs in artificial graphite. And all of this occurred during the normal winter production outage for natural graphite in China. China had a shorter and warmer winter with supply capacity capable of returning earlier. And whilst China domestic production is online, in many cases at the moment, cost of production is reported to exceed current price fees. Syrah's experience of Chinese customer purchasing behaviour remains extremely short-term and herd-like, and that leads to volatile contract performance and creates a whipsaw effect in market conditions. There are very positive factors ahead. Overall, EV demand growth continues. and anode material inventory will clear. March 2023 global EV sales were again above a million units, matching the run rate late in 2022. Chinese natural graphite anode material capacity is increasing, and that requires speed. Chinese mine capacity growth has been low, and grade remains a challenge. Chinese mines are reported to be under cost pressure, and the US Inflation Reduction Act means that anode material producers are accelerating plans to build capacity offshore in places like Korea, the US, and Indonesia that require ex-China third-party fees. Finally, ESG implications mean that higher volumes of natural graphite over more power-intensive artificial graphite will be preferred in ex-China markets. So the implications for SARA today are that in the short term, China inventory rundown time is required. and recovery of EV demand growth needs to flow through to anode material demand. SARA will focus on immediate sales from inventory and cost reduction at operations, inclusive of requirements for our solar and battery plant start-up this quarter, and will review a broader suite of BALAMA operating methodology options to determine how the operation can respond to market conditions more dynamically while focusing on quarterly production costs and margin generation. And we'll continue to reiterate a clear requirement around pricing compared to cost at a sustainable production volume. I'll hand over to Steve to make a couple of initial comments here on the LAMA before we talk some more about those operating options.

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

Stephen, as Steve noted, SARA's dependence on China sales means that more must be done to find operating alternatives during periods of market volatility. Attempting to navigate the situation only through awaiting outright market growth has not provided us with a wide enough range of options. And accordingly, companies undertaking a broader review than has been done before aiming to drive greater adaptability of the operation to a more dynamic volume requirements at an acceptable unit cost. And this may include combinations of how we work through inventory management. It may look at capital projects or operating rotations at Valama. Current China demand conditions and availability of material to sell from inventory mean that production will be moderated from Valama from next month. until demand and price conditions or contract commitments warrant current staffing levels will be maintained to ensure flexibility the operating team will focus on improvements bring forward maintenance and minimize costs in the short term the completion of the solar battery project within the quarter will see operational testing and assessment of production scenarios favoring renewable power sourcing and cost mitigation Otherwise, at Bulama during the last quarter, SARA continued its high performance in sustainability activities, and we've noted many of those in our quarterly sustainability report, which is released on our website today. And importantly, the recent security environment in Cabo Delgado has shown an improvement since last year. Moving now to the Vidalia further expansion DFS on slide 15. Today, on a very positive note, SARA announced the completion of the DFS for the expansion of Vardalia's production capacity to 45,000 tonnes of anode material, inclusive of the 11.25-tonne anode material facility that's currently under construction. The project DFS incorporated much learning from our current operating facility and the initial expansion project and confirms the expansion to 45,000 tonnes is technically viable, financially robust and is expected to deliver significant value for CSIRO shareholders and other stakeholders. 45,000 tonne Vidalia facility was assessed across a pricing range of $5,000 to $7,000 a tonne of anode material on a 2023 real basis. And across that range has an estimated NPV of between $208 million and $794 million, an unlevered IRR of between 14% and 23%, and a payback period from commencement of operations of between four and six years. The facility is forecast to be a financially robust high-margin operation with estimated annual EBITDA of between 103 and 192 million US dollars, and an EBITDA margin of between 44 and 60% across this price range. The deeply considered scenario reviews for the CFS assessed a final total installed capital cost estimate of US $539 million, including the US $38 million contingency to commissioning of the facility. higher capex than prior estimates is not unexpected given inflationary factors in the us and across global equipment producers but importantly the project demonstrates capital efficiency against a three times current capacity project base and installed operation and delivers key opex benefits an estimated steady state operating cost all in of the integrated 45 000 ton facility is $3,023 a tonne, assuming Valama Natural Graphite cost is US $425 a tonne, FOB, NACALA or EMBA. The pricing, CAPEX and OPEX inputs for the project have been built on experience and from a realistic base. Our interaction with suppliers, customers and the experience of product development, construction and capital project management have provided important context for the budget and timeline, which estimates a Q3 2026 start-up, which is well aligned with the US market demand profile. SARA intends to immediately proceed with the transition phase for further detailed and long lead item engineering and activities related to permitting, acquisition of adjacent lands and preparation works to maintain the project momentum. and those things will be undertaken ahead of a final investment decision to be considered by the CSIRO Board before the end of this calendar year and as soon as customer and financing commitments are finalised. Further information regarding the key assumptions, financial and economic outcomes in the implementation of the Vidalia further expansion project are contained within CSIRO's separate ASX release today. As further planned expansion of CSIRO's wholly owned and integrated spherical purification and furnace operation at Vidalia, which uses natural graphite from Valama, is compelling, providing to US customers a combination of scale, diversification of sourcing risk, Inflation Reduction Act compliant domestically processed product, and a fully traceable lower emissions intensity production path for material then occurs from China. Moving to Vidalia's current project execution, on slide 16 to 19. Construction of the Vardalia initial expansion project is progressing within the planned schedule under the management of an integrated SARA and Worley group team. Detailed engineering was fully completed during the quarter. Mechanical, electrical and instrumentation and equipment installation work fronts have intensified through Q1 and will peak through the next two quarters. The team are doing an outstanding job, noting that we are constructing an integrated facility that has not been done outside China at a commercial scale. 90% of overseas fabricated equipment has been delivered to site by the end of the first quarter, and the remaining items were shipped for arrival on site within the June 2023 quarter. Key activities progressed during the first quarter with steel erection, ripping and cladding of the milling and furnace buildings, equipment assembly and installation in the milling building, furnace section installation, interior and exterior structural steel installation and final mounting of the first power distribution centre. Activities expected in the current quarter are focused on advancing structural steel, ducting assembly and equipment installation, field fabrication of process tanks and progressing various other activities for the purification area, piping installation and taking delivery of the second and final power distribution centre. Operational readiness for the 11.25,000 tonne Bardalia facility, which includes preparing business and maintenance systems and operating teams through the commissioning, is on track for commencement in the September 2023 quarter. The total Bardalia employee count was 63 at quarter end and a further 45 roles are planned to be recruited prior to the start of operations. production. There are approximately also 250 construction contract personnel on site and safety is the primary focus in conjunction with project construction progress. The total estimated installed capital cost including contingency of the Vidalia initial expansion project was revised to US $180 million on known variances with potential variances being investigated ahead for a potential capital cost of US$186 million. And that's compared to the US$176 million cost estimate at FID. The utilisation of the contingency to date has been principally for higher labour-intensive construction costs to preserve the project schedule and true-up costs of certain mechanical and electrical work following finalisation of detailed engineering. At quarter end, total installed capital costs of US $178 million had been committed to, of which US $100 million had been invested. I'll now hand over to Steve to discuss the financial position and the key development in our balance sheet support. Steve?

Thanks, Sean. This quarter we are reporting total cash balance as well as noting the difference between restricted cash and unrestricted cash. as a result of the first drawing of the Department of Energy loan to fund the construction of the 11.25,000 tonne facility at Vidalia. Total cash at the end of the quarter was $84 million. Restricted cash at the end of the quarter was $36 million and represents cash balances held at the Vidalia project in operating accounts, loan accounts, including from the first drawdown, and reserve accounts. This separation of accounts and cash from the unrestricted group cash balances is a result of the successful initial drawdown of loan funding from the DOE loan facility, which occurred through the quarter of $21 million and which has been followed since quarter end by a second drawing of $44 million. As part of the first drawdown, we were required to fund certain loan reserve accounts, typical of a project finance transaction, as well as initial funding for a ramp-up reserve to ensure there is sufficient working capital for an orderly ramp-up and operation. Any funds in reserve accounts not used through construction will transition to those ramp-up reserve accounts and then subsequently into operating reserves, noting of course that even without debt funding, CSIRA would be setting aside funds for working capital through ramp-up as an example. Restricted cash also includes balances drawn down from the loan that have not yet been used to fund project costs. Unrestricted cash represents cash elsewhere in the group other than the Vidalia project, including funding for Balaama Capital and Working Capital. The unrestricted cash balance at the end of the quarter was $48 million, and the anticipated activano material inventory overhang and weaker natural graphite market demand has added pressure on the company's unrestricted cash position at quarter end. Given the more challenging external market dynamic for natural graphite material impacting working capital, as well as the importance of maintaining momentum on both phases two and three of Vidalia, given the demand for activato material in the downstream, it was appropriate to consider our unrestricted cash position. Recently, Syrah has been engaging with Australian Super regarding their convertible note position and intentions, and in conjunction with today's release, Australian Super has announced its intention to convert their entire outstanding convertible notes position into CSIRA shares prior to maturity and subject to shareholder approval. The Series 1 and 3 convertible notes were originally issued for 55.8 and 28 million Australian dollars respectively, accreting to approximately 108 million Australian dollars in total, with capitalisation of upfront establishment fees and interest to date. The CSIRA Board endorses this position rather than cash payout for conversion above 20%, which will see a shareholder vote required to approve the issue of shares at the conversion price, taking Australian super to approximately 30% ownership for Syrah. To provide flexibility around an uncertain liquidity position, Australian super has committed to additional convertible notes to the potential value of up to $150 million Australian dollars in three equal series. The first series of this funding will be issued as soon as practical, and shareholder approval sought from shareholders for issuance of the remaining two series. in conjunction with shareholder resolutions relating to conversion of all the new and existing convertible notes as required by the Corporations Act and at an EGM expected to be held in mid-July. Notice that this EGM will include an independent expert report and if shareholder approvals are obtained, the second and third series of notes will be available at CSIRA's sole discretion. The new notes are available in three tranches of 50 million Australian dollars. and are structured on a broadly similar basis to the Series 1 and 3 notes. There is a break fee of 1% if the note tranches are not issued, and a 2% establishment fee capitalised for each tranche. The capitalised interest rate is 11%, subject to achievement of shareholder approval for both Series 5 and 6 notes and Series 1 and 3 conversion, and 10.5% if cash paid. Prior to, and if the shareholder vote is not successful, The coupon is 14% capitalized and 13.5% cash paid. The conversion price on the notes is the 10-day VWAP of the 10 trading days prior to the date of announcement, which is $1.53.6 as of the 26th of April, 2023. FIRA took this decision in order to increase available liquidity at our option to support both the Vidalia project's development pace and to support the Balama operation, while preserving the ability to access other funding options in conjunction with a later decision on overall funding phase three when funding options are fully defined and the project is ready for fit with customer support. The company feels this approach best balances short-term certainty of funding with longer-term optionality. Australia and Super have reaffirmed their long-term support for the company and recognition of the critical nature of the Bulama asset and Vidalia downstream integration through their commitment to a long-term significant shareholder in the company. and provision of an additional five-year convertible mode facility. I'll now discuss Phase 3 funding for Vidalia, and with the release of the Phase 3 DFS, an update on our funding approach at the present time. As noted in October last year, the company was selected for a bipartisan infrastructure law battery materials processing and battery manufacturing grant of approximately US$220 million from the US Department of Energy to fund a significant proportion of capital costs of the Vidalia further expansion project. The DOE grant was originally expected to be closed in the June 2023 quarter, but now is being assessed in conjunction with alternative funding options. The factors under consideration are grant size compared to CapEx requirement, the ability for grant funding to sit alongside other funding in the capital stack, and various other expected conditions of the grant. In parallel for the DOE grant process, SIRA has been engaged with them on alternative funding and has recently commenced the application process for a further DOE loan of a significantly higher amount than the DOE grant under the Advanced Technology Vehicles Manufacturing Loan Program, which is the program for the current Phase 2 facility, as an alternative option to support the financing of the Vidalia further expansion project. I'll now pass you back to Sean.

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

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from John Schultz from Macquarie. Please go ahead.

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

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

Okay, thanks. And then just on the DOE grant, so June 23, as you said, it's probably going to pass. Is there a new date for when that is supposed to crystallise or how are you looking at the timeline for that grant in and around all the other finance and activities?

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

Thank you. Your next question comes from Alex Renz from Credit Suisse. Please go ahead.

Morning, Sean, Steve and team. Just congratulations on getting the daily DFS done. I've got a couple of questions. First one on the LAMA, just obviously max inventory again impacted operations. I think Steve mentioned there are currently three improvement initiatives, but doesn't yet include an inventory expansion option. So just wondering, what's the current discussion about expanding inventory capacity? What are the constraints? And also, could you provide maybe just a ballpark capital requirement figure?

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

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

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

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

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

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

Yeah, yeah, understood. And sorry, one last question just on the Tesla qualification timeline, could you touch on that, please? Also, I think back in December, there was a mention of AAM specification have been changed, have been updated in the off-take agreement. Could you give a bit more colour on what's changed? Has that specification changed, I suppose, been a setback on the qualification process?

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

Yeah, great. Good to hear that. That's it from me. Thanks, Sean Stevenson. Cheers. Thanks, Doug.

Thank you. Your next question comes from Dim Aryasinghe from UBS. Please go ahead.

Thanks, guys. Thanks for the call. Just one on the market first. You talked to... high inventories along the chain in China weighing down on prices. You guys got a read on when that eases? Are we starting to see inventories draw down now as EV sales pick up again?

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

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

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

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

Thanks, Tim. I think the first thing I would say is that whilst you might describe it as a pretty wide range, it's a much narrower range than you'll see. When you look across a lot of other projects that are out there that are seeking or planning on much, much higher prices in nano materials in that range that we've published today in the DFS, we think it's a realistic range. As to where it sits against China or Asia prices at the time that we come into production, yeah, I think, as I said during the call, there's pretty intense competition There's a lot of pressure in China at the moment with people seeking to build market share. There's a lot of discussion about whether NO producers are operating above or below, are selling above or below cost of production. And there's also obviously a focus on the fact that a lot of that production addition has been artificial graphite production which obviously brings with it some unwelcome emissions intensity to the supply chain. Looking specifically at Vidalia, I think there is a recognition that Vidalia provides diversification of sourcing risk. It provides localised supply. It provides an ESG or emissions intensity advantage. And there's a recognition or an understanding that capital costs of projects outside China is different than inside China and therefore the pricing and returns need to work for the project to be built. And that's one of the key reasons that there aren't a lot of anode material facilities, merchant anode material facilities outside of China today because it's taken some time for that bifurcation of the markets between China and ex-China to develop. But I certainly think that's there now. And the overlay of the Inflation Reduction Act and the benefits available for procurement of locally processed material are incredibly important to OEMs in the US as well. So I can't give you a forecast today on what prices will look like. in the US compared to China in a few years' time, but I think there's a strong understanding of some of the differentials that may drive differentiation in pricing.

That's great. Okay, cool. Thank you. Cheers.

Thank you. Your next question comes from Glenn Lowcock from Baron Joey. Please go ahead.

Oh, Sean, good morning. Thanks for taking my question. Sean, I just wanted to try and make sure I understand the business at Balama now, just in terms of cashflow. I mean, obviously you're talking about taking production down, not quantified yet by the sounds of it, but it's probably costing you $120 million to keep the lights on, you know, and you're only going to generate if you have production, maybe 40 to 50 million per annum. Do you think you can get the business at least to a point where at current pricing, and I appreciate things move rapidly every day and, you can at least trim the business to balance the cash flow or is it just trying to reduce the cash burn at Bulama? Thanks.

Thanks, Clint. Look, I would characterise things very differently than $120 million being required to keep the lights on at Bulama. We've talked extensively about having a 50% fixed, 50% variable cost split out at Bulama. I think from a fixed cost perspective, probably sit around $4 million a month with current setup. And as I've said, we're looking at how we best manage the operating cycle at the llama and ensure that we can get the best production cost or unit cost out of that operation through the campaigns that we are running until it's running at full capacity. So the key variable is obviously pricing. Pricing has been very positive through the course of last year. I think, as we said in the extensive introduction around the market, anode material probably got ahead of itself as cell production did compared to downstream demand. And that catch-up has to occur now. But ultimately, we want to make sure that we see pricing well in excess of the cost of production at the sustainable volume level. And the work that we're talking about today is understanding that obviously we've got a cost production, a unit cost target out there at 20,000 tonnes a month, between $4.30 and $4.80 a tonne. It feels in the immediate term that 20,000 tonnes of production you know, is not available to us. So the work we're trying to do is make sure we can get that unit cost as low as possible for lower volumes. And that work is not complete yet.

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

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

Okay. So, sorry, just as a last follow-up to that response, and thanks for that. If the shareholders voted down, what's the next option for you? And does AusSuper get to vote as well in this, or are they excluded from the vote? Sorry, I just didn't pick that up in the release.

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

All right. Thanks very much.

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

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

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