Syrah Resources (ticker: SYR) provided investors with a comprehensive update during their recent earnings call, discussing the impact of US government policy changes on graphite and anode sourcing, operational progress at their Balama and Vidalia projects, and strategies for maintaining shareholder value amidst market uncertainties.
The company is navigating through policy-induced market fluctuations while advancing documentation for a crucial $150 million loan and exploring US tax credit opportunities. Despite a challenging market environment, Syrah remains committed to expanding its customer base and securing offtake agreements, with an eye on cash preservation and cost management.
Key Takeaways
- US policy revisions on graphite sourcing create market uncertainty impacting Syrah’s near-term market position.
- Syrah is finalizing a $150 million loan for the Balama project and exploring US tax credits to bolster finances.
- Tariffs on Chinese graphite imports and US tax incentives affect the supply chain, stressing the need for domestic support.
- The company is focused on the operational efficiency of Balama and Vidalia projects, cost-saving initiatives, and customer engagement.
- Vidalia is expected to be profitable at current material prices, with significant sales projected for 2025.
- Syrah advocates for policy support for non-Chinese graphite supply and aims to be globally competitive.
Company Outlook
- Syrah anticipates the completion and disbursement of the $150 million loan in the near term.
- The company is assessing the impact of tariffs and tax incentives on the graphite supply chain and its operations.
- Syrah emphasizes the importance of US government support for the domestic graphite industry.
Bearish Highlights
- Uncertainty in US government policy has led to market challenges for Syrah.
- There may be delays in sales from Vidalia this year, with significant volumes anticipated only in 2025.
- The company is considering cash preservation actions if market conditions do not improve as expected.
Bullish Highlights
- Syrah is advancing towards securing offtake agreements and expanding its customer base.
- The company is exploring opportunities for tax credits in the US to improve financial positioning.
- Posco’s material requirements are expected to commence in the second half of 2025 and 2026, indicating future sales opportunities.
Misses
- Delays in the qualification process for Tesla (NASDAQ:TSLA)'s products have been a concern, with the transition period allowing for additional requirements from customers.
Q&A Highlights
- Shaun Verner from Vidalia addressed the qualification process delays, explaining the variability in customer specifications and timelines.
- Verner confirmed sales to Indonesia and emphasized targeting non-Chinese supply chains.
- Syrah is assessing the potential for increasing the proportion of large flake material at Balama to meet market demands.
InvestingPro Insights
As Syrah Resources (ticker: SYR) strives to navigate the complexities of the graphite market and operational challenges, a look at the company’s financial health and stock performance through InvestingPro's lens provides crucial insights. Here are key metrics and tips from InvestingPro to consider:
InvestingPro Data:
- Market Cap (Adjusted): 181.78M USD
- P/E Ratio (Adjusted) last twelve months as of Q4 2023: -2.11
- Revenue Growth last twelve months as of Q4 2023: -55.06 %
InvestingPro Tips:
1. Syrah Resources operates with a significant debt burden, which is an important consideration for investors looking at the company's ability to manage financial obligations amidst market fluctuations.
2. The stock price has been quite volatile and is currently trading near its 52-week low, suggesting potential opportunities for investors with an appetite for risk and a focus on long-term value.
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Full transcript - Syrah Resources (SYAAF) Q2 2024:
Operator: Thank you for standing by, and welcome to the Syrah Resources' Q2 Quarterly Report Update. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator instructions] I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead.
Shaun Verner: Good morning, and thanks for joining. With me on the call are Steve Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Investor Relations and Business Development. Today we will focus on three key topics; firstly, the significant and unexpected uncertainty created by the revisions to U.S. Government policy related to the implementation of the Inflation Reduction Act's guidance on graphite and anode sourcing, and its impacts on the near-term market. Secondly, Balama and Vidalia's operational progress and key position in the near and medium-term market evolution. And thirdly, our strategy and corporate actions for preservation and rebuilding of shareholder value through delivery against our objectives, including the delays that positive progress on the U.S. $150 million loan from the DFC, which we expect to complete shortly. We'll use the slide deck released along with today's report, and we'll start from slide five. Given its importance and the impacts on our current operational and market performance, we'll begin with the IRA guidance from the U.S., against which definition and customer response has continued to evolve throughout the quarter and post quarter end. In taking to develop anode material capacity in the U.S. through 2018, Syrah has proceeded through investment decisions independent of government policy support. But subsequent Chinese and U.S. geopolitical positioning and customer responses in the broader EV, battery, and the input material markets have made policy a very real factor in potential outcomes. Through policies developed by the prior and current U.S. administrations, Syrah has benefited from funding and support as the U.S. electric vehicle OEM and lithium ion-battery manufacturing capacity build-out has advanced. This was particularly evident with the requirement for OEMs to source graphite from non-foreign entities of concern or FEOCs, and that is supply from outside China or supplies not controlled by the Chinese government or affiliated stakeholders. In order for the OEMs to be eligible for lucrative consumer tax credits supported lower effective pricing for EV sales. The policy, which was primarily developed to ensure supply chain security in critical minerals, a number of which including anode material, are dominated by China, and subject to sub-economic pricing impacts. On May 3, the U.S. Government issued further guidance on the Inflation Reduction Act related to sourcing of materials and eligibility for these consumer tax credits. This guidance unexpectedly granted a transition period to electric vehicle OEMs sourcing graphite and anode material, extending the deadline by which automakers were required to use non-FEOC or non-Chinese graphite by two years, from the January 1, 2025 to January 1, 2027, provided that they met certain criteria to obtain eligibility for the extension, crucially, including demonstrating preparedness to meet the objective of local sourcing by 2027. In the short-term, granting the transition period effectively allows use of FEOC graphite supply until January 1, 2027, and was designed to increase EV penetration over the next several years by increasing the number EVs who were eligible for the IRA consumer tax credit. The ability of OEMs to secure significant volumes of non-FEOC graphite anode material over this timeframe was deemed difficult given the limited operating capacity that already exists or was planned to commission in the near-term beyond Syrah's business. While aimed at increasing EV adoption in the U.S. and supportive of Syrah's business in the medium and long-term, this extension to the deadline to source graphite from non-FEOC entities is counterproductive to the investment support provided to Syrah for development of Vidalia because there are impacts of this volatility arising on the graphite sourcing approach taken by customers in the near-term, the intensity of customer qualification processes already underway, and non-FEOC graphite supply chain development. With some of the implementation requirements still to be fully defined, there are both supporting and challenging aspects to the policy change. The positives include a requirement for OEMs to formulate and demonstrate a plan for non-FEOC graphite supply sourcing from January 1, 2027 through the transition period in order to be eligible for the consumer tax credits in the interim, which effectively requires earlier sourcing and qualification of anode material, the strong continuing commercial engagement from OEMs on large-scale offtake arrangement through existing production from Vidalia, and expansion of capacity and readiness for 2027, and beyond, and the support for and development of other ex-China natural graphite anode material production facilities requiring Balama natural graphite, with some making solid commercial progress to underpin development. The key challenges of the policy change are the uncertain or reduced near-term incentive for exists for U.S. customers to accelerate purchasing from existing non-FEOC graphite supplies, such as ourselves, given the availability and price of Chinese anode material. There's potentially extended timelines and additional technical and process hurdles being added by OEMs as they have more time, which can extend timeframes for qualification and sale of Syrah's products into the U.S. market, a lack of clarity in the level of commitment that OEMs need to demonstrate to the DOE in their transition plans towards non-FEOC graphite supply, and what the consequences are for OEM prior to 2027 if they fail to satisfy the U.S. Government requirement during that transition period. There's also uncertainty over the timing of investments into new ex-China natural graphite anode material capacity development given the visibility that investors require regarding government policy settings. And finally, there's impacts on our own timing over final investment decision for Vidalia's further expansion project to meet 2027 customer demand without clarity on nearer-term sales from our existing non-FEOC supply. The policy update had introduced significant uncertainty into the U.S. supply chain regarding near-term non-FEOC graphite sourcing given the intense Chinese volume and price competition. We see the immediate impacts as counterproductive to overall U.S. Government policy intent and customer supply diversification intent for critical minerals independence, allowing China to [retain] (ph) dominance of the global graphite supply chain, noting that they currently supply over 90% of graphite anode material globally. The most immediate impact has been that the transition period has allowed customers to concurrently extend timelines and expand requirements for product qualification of new materials, and to preference near-term Chinese supply that's delaying likely commencement of purchasing from Vidalia into 2025. While strong progress is still being made on additional contracting, we have less timing certainty on initial sales from Vidalia. And any potential impacts on ex-China demand for Balama products for 2025 and '26 still to be confirmed. We're working intensely with Balama and Vidalia's customers and stakeholders to maintain a close dialogue and progress in our qualification processes and sales as quickly as possible to diversify our sales options through existing and future capacity to ensure the highest commercial incentives for purchasing. We're working with government agencies to highlight policy impact, advocate further implementation parity and manage our funding relationships. And we're minimizing our own working capital costs and inventory risk by carefully managing the ramp up of Vidalia to preserve cash in the event that customer purchasing is delayed. Moving to our key operational and market headlines on slide six to eight, the uncertainty introduced by U.S. policy implementation along with the evolution of the Chinese domestic anode market and customer responses to overall EV growth rates have been evident in [technical difficulty] progress through second quarter this year. Key market and operational points are that, firstly, global EV demand growth increased 24% in the June 2024 quarter compared with the June 2023 quarter to four million units, but was biased to stronger growth in China, and a higher proportion of plug-in hybrid vehicle sales than previous counts. Oversupply of artificial graphite anode material and ongoing deeply negative price competition in China is incentivizing higher use of artificial graphite anode in the Chinese domestic battery market, leading to reduced spherical graphite production and natural graphite fines consumption in China. Nearly 10,000 tonnes of natural graphite was sold and shipped to third-party customers during the quarter, with no fine flake sales for Chinese anode customers. We took the decision not to sell into record low prices, and this was reflected in the loss of anticipated breakbulk demand later in the quarter. Positively, our weighted average sales price was $735 per tonne CIF, with a more significant proportion of high-priced coarse flake in the sales mix. Balama undertook one production campaign to account for earlier inventory draw down with 24,000 tonnes produced with 78% recovery and strong campaign operating an ESG performance during second quarter. Costs in the operating period were in line with our expectations. Operations of the Vidalia anode material facility are ramping up with solid capacity utilization demonstrated in all primary process areas with lower immediate need for that capacity and inventory build. We have dispatched specification commercial scale production samples to Tesla and to other tier 1 customers with positive initial testing feedback received from three tier 1 customers. Vidalia anode material sales are now expected in primarily 2025 with expanded customer qualification requirements and extended timelines are rising concurrent with the U.S. government policy change are incorporated into that planning. And there has been continued strong progress we made on commercial Vidalia sales supporting potential expansion. And the 25-day timing being increasingly dependent on clarification of both government policy and demonstrated sales from their initial capacity. I'll now handover to Steve to talk about the current financial position, government funding updates, and progress in developing Syrah's financial position aligned with our longer term downstream customer and policy support. Steve has been heavily engaged with government agencies in the U.S. throughout the recent months and will make some additional comments on his interaction.
Stephen Wells: Thanks, Shaun, and good morning, everybody. Syrah's quarter end cash balance was $82 million, and included $41 million of restricted cash relating to Vidalia. Of which, $27 million is available for funding the operations during ramp up. Proceeds of $30 million from the rate component of the first quarter equity raise were also received during the quarter. Excluding the proceeds from the equity raise, the cash outflow from unrestricted cash for the quarter was $53 million. Of which, $24 million was contributed to Vidalia restricted cash primarily to fund the working capital reserves for the ramp up of production of those facility. Balama net working capital and capital outflow of $6.5 million reflects the focus on cost management at Balama as well as proceeds from BTR Indonesia at the end of the first quarter with cash proceeds received in the second quarter. Through the second quarter, shareholder approval was received for the conversation of Australian Super Convertible Notes Series 1 and 3 under revised conversation price to simplify Syrah's overall capital structure and remove the material potential redemption requirement later in the year. Clearly, the DFC loan has not closed by 30th June as we had anticipated. It is the first line by the DFC into Mozambique. However, we have made good progress with documentation essentially agreed and now going through our final approval processes which are expected to complete shortly. We are targeting immediate term completion and first disbursement of the $150 million loan to support Balama through this current period. And, appreciate the support of the stakeholders through this process to completion. We continue to assess opportunities to access tax credits in the U.S. on the both 45X and 48C programs noting the companies are ready to access one of these two programs and the rules under the 45X program are yet to be finalized. There are multiple rounds of 48C program and an active market is developing to monetize these types of tax credits in United States. As Shaun noted, there has been significant activity in other parts of the areas with direct implications for Syrah including the application of the 301 tariffs on imported graphite from China and the foreign entity on sourcing of graphite to enable customers to benefit from 30-day consumer tax cuts on purchases in the U.S. We are very much at the forefront of engagement on this topic. Given the progress we have made in developing the supply chain in the United States, our ownership of the globally significant Balama mine, and funding support through various programs we have with different U.S. government agencies. In particular, we have engaged heavily across various agencies and elected representatives to underline the immediate impacts from this policy position on the Syrah business, and frankly, the U.S. domestic graphite supply chain will broadly over the longer term unless there in an increased immediate commercial imperative to domestically produce material. There is a clear need for U.S. government policy to ensure that the developing U.S. industry is supported. So, it can gradually make broader strategic and economic gains over the medium to longer term. Also worth noting at this point in U.S. election cycle but from critical minerals perspective, there has been significant bipartisan support to supply chain security endorsed by the current and previous administrations over extended period of time. And we would expect this to continue irrespective of the outcome of the U.S. elections. Noting, of course, the policy may differ depending on the outcome. And I'll now pass you back to Shaun.
Shaun Verner: Thanks, Steve. Moving on to the operational update on slide seven and eight, firstly, the Balama where we won't spend significant time in these updates. Suffice to say that the processing plant is performing well and operating in campaign mode. Recoveries were solid. In our recent campaign strong confidence exists that further recovery increases and greater efficiency opportunities once consisting operations are possible. C1 costs were U.S. $460 per tonne in the operating period benefiting from a higher production rate compared with the last quarter and the Balama C1 fixed costs FOB Nacala and Pemba were below $4 million per month during the non-operating periods. Shipping costs were higher than average, given the destination mix at $120 a tonne during this quarter leading to an leading to an implied operating period fixed cost of $580 million a tonne for the quarter. Graphite production from Balama will be focused on restocking as required by sales and opportunity to increase full stock production is being investigated, given the current higher demand and pricing for those products. We expect to continuing to deliver on our product quality. And Balama team is well across maintenance programs giving campaign downtime opportunities. Further efficiencies gains are focused on recoveries, increased solar and waste power utilization, contract mining, and logistics to ensure that production and standby cost is managed to as lower level as possible whilst market conditions remain problematic. Moving to Vidalia, the Vidalia operations team have made solid operating progress in ramp up, navigating some early operating challenges and utilizing strong problem-solving skills, bringing on lots of first commercial scale integrated natural graphite anode material facility outside China. Very positively sustainably oil production has been on specification. And the small volume was initially on target with successful rate prices to meet specification. I am very pleased with the product quality following sample dispatch have already received positive initial stage qualification from three Tier 1 customers against specification. We initially targeted 80% capacity utilization by the forthcoming six months mark following commencement of on-spec production. Through June and July, however, it's become apparent that maximizing production volumes and inventory build, by the certainty qualification sales timing is not in Syrah's current interest. Initial ramp up challenges primarily impacted bottlenecking in the milling area, pending some final implementations requirements and the timing of full furnace capacity availability noting that we were behind target on total capacity utilization. With the lower need for immediate production, however, we are focused on demonstrating peak production capacity in single lawns in key operating segments of the plant. Key progress in peak performance of 60% in milling, 70% in purification, and 80% in bonus operations across single lines has been achieved. Importantly, this progress demonstrated today gives us confidence in 80% integrated capacity utilization through this half if it's required. Given the lower requirement for immediate inventory, we have also have taken the opportunity over the past six weeks to work on an additional product stream to broaden the customer product offering. And this has also contributed to the lowest total integrated plant capacity utilization levels of 24% in milling, 30% in purification, and 40% in carbonization today. The Vidalia operations team is building significant operating experience through plant ramp up and qualification. Commercial qualification processes include higher levels of detailed technical interaction and custom site business, providing Syrah with further opportunities to ensure best practice across various customer requirements and operating processes. Now, moving to the market and customer engagement section on slides nine through 11, with significant attention on government policy actions between the U.S. and China, it's important that retain focus on both the results and on underlying market dynamics, which will ultimately demonstrate Syrah's importance to the global graphite and anode material supply-demand balance. Syrah continues to focus on the development of ex-China offtake for Balama fines production, noting it appears that Posco's South Korea spherical graphite capacity and BTR Indonesia's anode material capacity are progressing close to their previously anticipated timelines. And Westwater in the U.S. has secured anode material offtake to underpin development. All of these operations have demonstrated demand for Balama material under offtake or spot contracting. New interest in processing and qualifying from both Chinese joint venture and ex-China potential plant developments has seen some consumption of Syrah's Balama materials from stocks for testing processes, voting well for future demand. In the immediate term, however, EV materials market conditions are very challenging. Whilst global EV sales increased 24% in the June quarter compared with the June '23 quarter, most of the growth was in China, with a number of EV and battery producers outside China revising growth projections or deferring capacity expectations. At the same time, anode production in China increased 33% in the June quarter compared to the March '24 quarter and increased 41% compared with the same quarter last year biased heavily towards artificial graphite anode material. This artificial graphite anode material production capacity in China has expanded significantly over the past three years creating a notable imbalance with market demand. The growth has created intense competition within China and prompted aggressive pricing strategies amongst new market entrants and a corresponding reaction from established suppliers, leading to reports of a high number of loss-making operations. Artificial graphite anode material supply in China is dampening overall natural graphite demand. Domestically, Chinese natural graphite production remains modest, aligned with current subdued demand levels, and demand for imported natural graphite remains very low. Current price bids both domestically and for imports of fines are below the estimated cost thresholds for all producers involved. While Chinese export volumes for both anode material and spherical graphites have recovered to levels seen in the period prior to announcement of the China export license controls, the low demand for natural graphite anode material in the domestic market has meant that export anode material requirements were able to be met from domestic natural graphite production or stocks in China through the second quarter. And that anticipated break volumes of import later in the quarter did not materialize and no Balama volumes were exported to China. Any increase in the combined domestic and export requirements for natural graphite anode material is however likely to incentivize import volumes. Moving to natural graphite anode material, in the U.S. future demand far exceeds available non-FEOC supply and a strong commercial environment still exists for additional sales to build. In addition to the offtake contract that we have with Tesla for initial volume from Vidalia, anode material offtake discussions continue to progress well with others for future volume, with one further significant offtake contract process now through all commercial negotiation and pending legal completion and approvals, which we expect to complete shortly. We can continue processes with Samsung (KS:005930) SEI, LG Energy Solution, and Ford (NYSE:F) and SK On under our MOUs, working toward offtake, and note that investment decisions for non-FEOC supply expansions really need to be made now to meet customer requirements under the IRA in 2027, considering development and customer qualification lead times. Customer commitments must be made before a potential Vidalia further expansion project FID is considered. Finalization of a binding offtake with Tesla against their option declaration for additional volume from an expanded Vidalia facility is subject to Syrah's agreement on commercial qualification terms and will obviously be influenced by satisfactory progress and timing of sales from the initial capacity. Despite the policy uncertainty, sourcing risk diversification and demand for local U.S. supply continues to underpin expected demand for Syrah's products, and this is reflected in ongoing commercial progress. So, looking ahead to catalysts and making some concluding comments around the government policy position. The initial investment decisions for Balama and Vidalia were made on the base market views and economics without any expectation of policy support. We believe that the asset quality and operating cost position of both Balama and Vidalia is sound. Subsequent Chinese government support for sub-economic low ESG quality artificial graphite industry expansion and graphite export license controls as well as U.S. government counter policy measures for critical minerals independence such as FEOC requirements, tax credits, tariffs and other policy instruments have markedly changed the underlying global markets for EVs, lithium-ion batteries and anode materials and today are having particular impact on graphite and anode. When negative impact arises from one government intervention or policy, creating a level playing field may require a policy response from other governments and markets until fundamental supply-demand dynamics are restored. We also note that where customers and governments rightly demand higher ESG and production standards, different controls or processes, or expanded quality parameters in one jurisdiction over another, commercial outcomes or policy support may be needed to account for the costs and timing of that differentiation. Syrah is continuing to work with customers and relevant government stakeholders to ensure our ex-China capacity is utilized as quickly as possible and that further expansion is viable. Despite the challenging immediate market conditions, there remain significant positive catalysts ahead, and Syrah's advanced development stage relative to all other natural graphite and integrated anode material projects provides us with a unique position. Those catalysts include the finalization of the DFC loan, which is expected shortly, continuing progress in further anode material offtakes for current and future potential supply from Vidalia; progress in various testing and qualification processes, and interest from both Chinese and ex-China spherical and anode material buyers in utilizing and securing the Balama product for longer term supply outside of China. It's also important to recognize that changes in the graphite and anode market dynamics repeatedly been sudden and significant and Syrah seeks to maintain readiness ahead of any of our competition to take advantage of improvement in the market as it arises. We continue to take action to deal with the impacts of recent policy and customer developments and the challenging market conditions for natural graphite on near-term cash flows. With cost-saving initiatives underway already, we have further cash preservation actions being considered for implementation if pending market catalysts and customer purchasing intent do not evolve as expected, or if changes to the Balama campaign production rates or Vidalia operations ramp up are required. We strongly believe that policy levers and transition rules under the IRA should incentivize as soon as possible purchasing under customer offtake arrangements, this incentivize support for sub-economic subsidized supply and encourage new offtake agreements to support the longer term objectives of the U.S. government and U.S. customers for non-FEOC graphite supply and we will continue to advocate for that accordingly. Our objective is to have producing assets that are globally competitive, independent of government policy to ensure the long-term viability of the business. In the immediate term, our objective is to remain increasing sales revenue as soon as possible, the retention of future value and management of costs, the preservation of cash. Thanks for the attention today and we'll now move to question-and-answer.
Operator: Thank you. [Operator Instructions] Your first question comes from Ben Lyons from Jarden. Please go ahead.
Ben Lyons: Thank you. Good day, Shaun. First question on Balama, please. There was a statement in the release that without a substantial improvement in Chinese import demand, the expectations currently for the second-half of the year fall short of the minimum levels required to incentivize production under the current operational framework. Just wondering if you can possibly elaborate on that statement, are you implying that there's a potential scenario, where the asset might pass into care and maintenance out of campaign mode into a closure scenario in the second-half of the year if you don't observe Chinese import demand? Thanks.
Shaun Verner: Thanks, Ben. I think there's an interim stage, certainly before any decision around further reduction would be considered. And ultimately what we're saying there is that the target of seeking to sell consistently each month and run at least one campaign through each quarter is compromised at the moment, or was compromised during Q2. And in the absence of an improvement in import demand from China, that we would have to consider how many campaigns we run, and also consider the cost initiatives that we have available to us particularly to manage the standby costs and try and reduce further that $4 million a month it's currently costing us when we're not operating.
Ben Lyons: Okay. Yes, that's quite clear. Thank you, Shaun. Maybe the second one on Vidalia, please. There's a lot of positive statements in the release and in your commentary around advanced negotiations with a very high quality roll call of potential customers like Ford, SK, LG, Samsung, et cetera. Just trying to close the circle, I guess, on the clear level of interest in the product that Vidalia is capable of producing, and the lack of firm commitments from those high-quality potential customers to date. And I know it's related to a lot of your commentary around government processes, et cetera, and in incentivizing ex-China contracts to be actually signed up. But I think probably the most positive statement that was contained within the release was that you are expecting to shortly close a significant offtake agreement with the Tier 1 U.S.-based customer for supply from that facility. So, any further detail you could give on potential volumes? Any further detail about the potential customer would be greatly appreciated. Thanks, Shaun.
Shaun Verner: Thanks, Ben. I mean, obviously, I can't say too much more until that finalizes. But just coming back to closing the circle there, I guess there's -- the dynamics are shifting significantly all the time, and this has been part of the reason for some of the extended nature of some of these negotiation processes. You've had a backdrop of Chinese supply of natural and synthetic graphite anode material that's continued to overproduce, and price has fallen. And there's a significant question around what is the sustainability of that pricing and that volume availability, and when will rationalization ultimately occur in that part of the market. And with that backdrop of shifting price and availability, I think the OEMs and battery manufacturers are constantly measuring U.S. uptake against the shifting benchmark. Clearly, government policy settings changing through that negotiation period causes a reassessment. And I think there's still a very strong view that U.S. OEMs and battery manufacturers want to secure long-term, high-quality locally sourced material from the U.S., and they want to do that competitively. But they need to understand what changes in government policy setting mean for their competitiveness of overall battery cost and sourcing of anode material through that time. And I think the other thing that has been occurring through the last six months, at least there's been some shifts in overall adoption rates of EVs. And there's no doubt that there's been some changes in timing and expectation around sales volumes, EV production capacity, and battery manufacturing capacity, particularly the timing of new plants, which is also causing some reassessment or ongoing assessment of what volumes are required. I think the -- from the opposing side, what's absolutely clear is that there is nobody else at this stage who has built capacity and demonstrated the fully integrated supply chain, so we are right at the forefront there. And we also have a very strong view of the value of having completed that process, and what's required to incentivize the next investment for expansion at Vidalia. So, it has taken time, but we want to make sure we've built in the learnings from our first process, and make sure that we have the best possible roster of offtake through the expansion.
Ben Lyons: Okay, thank you very much, Shaun. Thanks.
Operator: Thank you. Your next question comes from Mark Fichera from Foster Stockbroking. Please go ahead.
Mark Fichera: Yes, hi, Shaun. Just a question about the ramp up at Vidalia, understand just given the cash burn you want to curtail production or manage that, but also, obviously, you want to achieve the commercial rate to achieve sales early next year. So, just thinking about the ramp up now, should we be thinking the ramp up will come more later this current year, early next year or should we still be thinking sort of a linear ramp up from now, so it's going to be sort of gradually reach that 8,000 or will it be more sort of an intensified ramp up towards -- in this year, early next year? Thanks.
Shaun Verner: Thanks, Mark. I think much more the latter. We want to align that ramp up volume with customer demand. Having said that, we also want to be absolutely certain about our integrated capacity utilization, and we will do some further work in the coming months to ensure that we have full confidence on that front. But overall, that the ramp up volume will be very much aligned with what customer requirements are, and the continuation of the qualification process.
Mark Fichera: Right. And in terms of -- Steve mentioned about the cash burn at Vidalia during the quarter, should we expect something similar for the September quarter?
Shaun Verner: No, we expect it to be obviously lower because a lower operating rate. We had been very focused on seeking to ramp up as quickly as possible in first and first-half, the second quarter. So, we also had quite a number of preparation elements to that cost base in the start of the process. So, we expect cash burn for Vidalia to be lower in the event that we are not seeking to ramp up capacity.
Mark Fichera: Right, okay. And just one final one from me, on the DFC loan, obviously you mentioned in the release you expect that shortly. Is it reasonable to assume shortly could mean a matter of weeks or by the end of August, just to give a rough timeline of your expectations, would that be a reasonable assumption?
Shaun Verner: Yes, that's certainly the intent, Mark, because obviously we were trying to have that completed before June 30, the vast majority of core material stuff we've done in some administrative processes and approvals which are through the finalization steps now, so seeking to have that done as quickly as possible. And I think there is a strong understanding from all parties, ourselves, the DFC, and government in Mozambique are all involved in the approval process of the importance of making sure that this is complete.
Mark Fichera: Okay, great. Thanks.
Operator: Thank you. Your next question comes from Dim Ariyasinghe from UBS. Please go ahead.
Dim Ariyasinghe: Thanks, Shaun, and thanks, Steve. Just a couple of questions from me, so I guess the first one just on the market, obviously disappointing that the U.S. has kicked the can down the road with regards to FEOC and Chinese imports. How has that affected, I guess, the intensity of new downstream in your real customers to engage with you? And maybe a bit of clarity, and it feels really vague how they're supposed to demonstrate efforts to move away from China within those two years to get IRA support, like how does that work, any clarity around that?
Shaun Verner: Thanks, Dim. Yes, I think there's still implementation process underway at the moment around how that -- what is required for that demonstration of sourcing intent prior to 2027, and how that is reported. And certainly there's still understanding to come about what the processes of DOE assessment of that and assessment of eligibility for the tax credits. I think in our engagement it's clear that there is a very strong view from DOE that the 2027 timeframe is a hard deadline and they need to see very material steps from OEMs and battery manufacturers towards that timeline. The question is to what does it mean for engagement? Clearly, there are always long leads on these types of contracts and a lot of our engagement has been around the expansion of Vidalia to 45,000 tonnes, which already had a two plus year lead time on it. So, the level of intensity, as I mentioned during the call, on engagement around further offtake is still very good. The challenge is that in the immediate term, there's a backdrop of availability of significantly lower priced Chinese anode material that doesn't have a consequence for OEMs and battery manufacturers at this point in time in the U.S. So, there's a tension there between near and medium-term. The positive is that the engagement is very, very good on the further off-take and we have demonstrated very clearly that we can bring this capacity and this capability to market and we want to expand.
Dim Ariyasinghe: Yes, yes, cool. Thanks. Maybe one other, just hypotheticals and touching on Benny's question before, I noticed you didn't ship anything to Vidalia this quarter. Line is a drag. If you were to go into some interim stage or care and maintenance, is there a way that you could even refocus on Vidalia? Like, is there a universe exists where it's amply stocked and you can focus on Vidalia and let Balama sit idle until the market turns?
Shaun Verner: Yes, I mean, we have obligations clearly to ensure that Vidalia can continue through its ramp up processes and is adequately stocked, is being regularly shipped to, et cetera, under our funding arrangements with the DOE and we will absolutely make sure that we meet those commitments. Ultimately, what will determine the operating rate of Balama and the structure of operations at Balama will be those demand signals out of China in the short term and how quickly Posco, BTR, Indonesia and other ex-China facilities require further demand. It's important to remember that those facilities are not years and years away. The BTR Indonesia facility is ramping up production. Posco is moving ahead well with their spherical capacity. So, we're not talking about very long periods and we expect that there will be some Chinese, it's a matter of how quickly that comes through to market.
Dim Ariyasinghe: Thanks. Thanks, guys.
Operator: Thank you. Your next question comes from Andrew Harrington from Petra Capital. Please go ahead.
Andrew Harrington: Thank you for your time, gents. A couple of questions, with Vidalia, are you expecting to make -- so you're going to be producing at a very low rate for sampling for the rest of this calendar year and then having sales in 2025 also at a low rate, far below the 11,000 capacity?
Shaun Verner: No, certainly not necessarily at a lower rate in 2025 and the rate that which we produce during this year will be determined by what arrangements we come to with customers about the ramp up profile and qualification processes for next year. So, there's still more to be determined on that front. We are just I guess, identifying and communicating that it appears less likely that there will be sales this year and that a more significant ramp up profile will be from early 2025. But we'll provide more information as we get that.
Andrew Harrington: So, production even in 2025 will be mostly related to sampling and qualification rather than actual sales?
Shaun Verner: No, that is not what I said. I said that 2025 production and sales profile will be dependent on the arrangements that we come to with customers through the qualification process and we absolutely anticipate there will be significant volumes of sales in 2025.
Andrew Harrington: Okay, thank you. And then, I guess the second part of that is running at let's say you're running at $10,000-$11,000 for Calendly '25, Vidalia is profitable at the current price of material that you have to compete with or how do you see Vidalia standing up at an $11,000 rate?
Shaun Verner: So, the contractual arrangements that we have in place and that we put in place, seeking to put in place for Vidalia, all reflect the cost structure and the intended profitability of that facility and we have no objective to do anything other than that, certainly seeking to ensure that we continue with the contractual arrangements that we have in place and those that we're building to ensure that we're operating profitably at 11,000 tonnes of Vidalia.
Andrew Harrington: Okay, thank you. And then, back to Balama, what's the most in terms of proportion of large flake material that you can get out of the plant? Essentially, you're limited by the fact that you can't sell the fines profitably at the moment as I understand it and so trying to maximize large flake makes sense, but what's the crossover point where that's worthwhile to start production if we assume current prices.
Shaun Verner: So, there is a resource limitation and then there's a processing limitation and historically we have averaged somewhere between 12% and 16% coarse flake depending on the mix of medium and high grade materials we're running off the ramp. What we are doing at the moment is assessing whether there is a short-term processing opportunity to materially lift that coarse like proportion and if we are able to do that we will obviously assess the cost and operating parameters around it, but something that we have we have looked at previously, but certainly not in environment where the price differential between coarse and funds was so significant as it is at the moment and that may give us some additional guidance on how we take it forward.
Andrew Harrington: Okay. Thank you. Thank you for your time. Cheers.
Shaun Verner: Thanks.
Operator: Thank you. Your next question comes from Reece Frith from APSEC Funds Management. Please go ahead.
Reece Frith: Hi, Shaun. Just a quick one on the clarification of the IRA timeline, I guess, arbitrarily there wasn't really enough FEOC supply to sort of feed the market anyway, so I'm not really understanding how it's a surprise that it's a transition period. I'd just like to understand your comments on that?
Shaun Verner: Yes, I think, it comes to how you incentivize, and there are multiple policy lever options, which could have achieved both some degree of flexibility for OEMs and battery manufacturers in the intervening time, but also incentivize faster adoption and faster expansion of non-FEOC capacity. So, we see that it was very clearly a decision made to advance electric vehicle sales and the availability of credits to the maximum number of vehicles. But we firmly believe that there are other policy leaders that could assist in achieving both that and the advancement of volumes out of our facility and other facilities that are ex-China.
Reece Frith: Right. Okay. And can you just clarify with the technical qualifications? So based on the language here at Vidalia, it says you're happy with what you're producing, but things are getting pushed back a little bit with customer behavior as you're saying. Can you just I guess cut through with is this an issue on Tesla's end in terms of qualification and, which sort of the process in the purification and the sterilization what issues are, can you just talk a little bit to that please?
Shaun Verner: Some of these, we're not going to make any specific comments about particular customers. But what I would say is that the qualification process is firstly around the physical, chemical, and electrochemical performance specifications of the product itself. And then, secondly around the series of process and measurement aspects. And every customer has a different set of those and a different timelines for those, and different series of exit points. And, I guess the timeframe of the transition period has afforded the customers the ability to add as many of those requirements into the qualification process as they see fit. And, that has the impact of potentially expanding the timeframe as well. So, it's not to indicate that there are necessarily the issues in the process. It's just a matter of urgency that if someone was required to source a material by a deadline and they have a high degree of urgency potentially to accelerate qualification compared to what might be a more conservative process.
Reece Frith: Okay, fair enough. And then, can you just touch on the new product stream, I mean, why do you thought, I need to sell [indiscernible] before you're supplying to Tesla, can you just touch on that please?
Shaun Verner: I am not going to make any specific comment at the moment. Suffice to say that it's utilizing all the existing process and existing infrastructure without change. It's more on the material specifications that we achieved through the process, as and when we move ahead further on that, we will provide some more information.
Reece Frith: Okay. And then, just on some of your customer updates, I mean we saw that breakbulk to BTR, can you just help us give an understanding of sort of the ability to sell into that first train in Indonesia? And then, whether there are not Posco sort of come to an Fid on their domestic facility as well?
Shaun Verner: Yes. I mean, obviously, we sold into Indonesia around at the end of last quarter. And clearly there is a recognition of the importance of Balama to non-Chinese supply and lifestyle high quality supply regardless of any legal challenges. So, we firmly target further sales into Indonesia, and as we continue to work with BTR and trying to make those things move ahead. With regard to Posco, our understanding is that their timeline is still very similar to what it was with likely requirements in the second half of 2025, more material requirements in 2026.
Reece Frith: Okay, thanks for that Shaun and Steve.
Shaun Verner: Thank you.
Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Verner for closing remarks.
Shaun Verner: Thanks everyone. We under that there is lot to take in through this particular update and a lot of interdependency between policy operations in market. Thank you for the questions and the interest. And we look forward to keeping everyone updated. Thank you a lot. Bye.
Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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