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Edited Transcript of GXY.AX earnings conference call or presentation 29-Aug-19 11:00pm GMT

Half Year 2019 Galaxy Resources Ltd Earnings Call

West Perth, WA Sep 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Galaxy Resources Ltd earnings conference call or presentation Thursday, August 29, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan David Rule

Galaxy Resources Limited - CFO

* Simon Hay

Galaxy Resources Limited - CEO

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Conference Call Participants

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* Adam Ritter

Alceon Group Pty Limited - Director

* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Harsh Bardia

Citigroup Inc, Research Division - Senior Associate

* Nick Herbert

Crédit Suisse AG, Research Division - Research Analyst

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* Reg Spencer

Canaccord Genuity Corp., Research Division - Mining Analyst

* Warren Edney

Baillieu Holst Ltd, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the half year results call. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, CEO, Mr. Simon Hay. Thank you. Please go ahead.

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Simon Hay, Galaxy Resources Limited - CEO [2]

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Good morning, everyone. Welcome to the call. Joining me today is Alan Rule, CFO; and Anthony Tse, Executive Director.

Firstly, a reminder that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors. Information presented is on our best judgment based on today's information. Actual results may vary based on these factors.

Today I'll step through the presentation fairly quickly as it's largely in line with what we outlined on the quarterly call in July, and further to the noncash impairment announcement which we foreshadowed in early August.

Firstly, with safety, we experienced 1 LTI in Sal de Vida in the half, and that gave us 2 LTIs across the rolling 12 months. Both these low-severity LTIs individuals made complete rapid recoveries, however, still very disappointing. Safety is our key focus, particularly for the Sal de Vida team as activity ramps up on-site. Implementation of group policies and standards continues, and we're certainly beefing up our safety management skills on-site with further recruitment and interaction with Australian safety management personnel. Pleasingly, Mt Cattlin remains LTI-free.

On operational performance. Mt Cattlin had a very solid first half, produced 98,300 tonnes of spodumene at an improved grade of 5.9% lithium oxide. Cash cost significantly improved on half 2 2018 and back to the levels we saw in the first half of 2018 at the USD 397 per tonne for the half. We did produce positive EBITDA of USD 9.4 million pre inventory write-down. And at the end of the half, we had cash in the bank of USD 176 million and nil debt. Obviously, that's changed since recent events.

Just worth pointing out the cash in -- is held in the Argentinian entity, which we received from POSCO, that's held outside of Argentina almost exclusively in U.S. dollars. So -- and we look at our cash management processes very closely on those U.S. dollar funds.

Delving further into Mt Cattlin performance. As I said, we had a very strong half of production. We did achieve improved recovery and mass yield compared to the previous half. And this is quite significant because it was produced at a higher final product grade. The team has spent time now operating the plant at this higher product grade, and determined the new grade recovery curve at these higher product grade levels. And this shows that we experienced a 3% recovery loss for each 0.1% grade increase. These are approximate numbers, but we have a fairly good handle on it now.

From here on, we'll target grades to meet customer specifications. And not all customers will require a 6.0% lithium oxide final grade, so we will optimize the plant based on customer specs knowing these recovery losses. So as we predicted in July, we'll aim for a maximum recovery of around about 65% at a 5.7% to 5.8% lithium oxide con grade. And when we're targeting a 6% con grade, our recovery at present is 60% recovery at that level. Now this is absent further improvements, and we have multiple recovery improvements that are underway.

Pricing. As you can read through, we had significant price drop experienced in half 1. Our U.S. dollar per tonne realized price of $584 is well down on the $900 levels experienced in 2018. Even at these levels, we're still achieving positive cash margin on tonnes produced and tonnes sold.

Moving on to Mt Cattlin optimization. We have many initiatives underway, and we're making solid progress on most of those. And it's worth just spending a bit of time on those today, some of those. Our in-pit ore sorting is aimed at reducing haulage costs and reducing ore wastage, and we have a number of initiatives there that are underway and already yielding improved performance. The final product ore sorter, a very important project for us, is not fully optimized. We've made really good progress in recent weeks, and we are getting very close to levels of acceptable performance. So that further improves our ability to lift final product quality.

On the re-liberation circuit, we've got small modifications planned here to improve the rejection of coarse low-grade stream, which is currently affecting the performance of the DMS circuits. And again, we expect a small recovery gain from implementing this improvement.

In the pit, we have 2 mining faces open, and this is yielding results with that increased flexibility. And we're seeing high levels of ore on the ROM pad and the mine is now clearly not the bottleneck which is a significant improvement on recent times. We've increased our mining expertise on-site with further recruitment of experienced professionals, and we're working on the optical ore sorter to enable the treatment of contaminated ore, which we had on-site. We have a stockpile of approximately 1 million tonnes. So that project is very important. If we can get the ore sorted, the front end of the plant working, we can start consuming that stockpile.

And also in July, we commissioned the in-pit dumping of waste. We received approval from the regulators in July. And this project reduces our haul distances and dumping costs, so a nice project to have underway.

Finally, we're working with all our major contractors on contract extensions, and in some cases we're in renegotiations. So there's a lot of further upside we think we can achieve from all these initiatives. We have a lot going on, but the team is fully focused on the productivity and cost rationalization projects.

With that, I'll hand over to Alan to take us through the next few slides on the financial results and the noncash impairment. Over to you, Al.

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Alan David Rule, Galaxy Resources Limited - CFO [3]

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Thank you, Simon, and good morning, everyone. Noncash write-downs and impairments of $176.8 million across inventory; property, plant and equipment; and deferred tax. Due to the weakness in the spodumene price, inventory was written down to net realizable value. It's important to note that the write-down was entirely due to the noncash depreciation and amortization costs that flows through inventory. The write-down was not due to cash costs.

Property, plant and equipment, which includes capitalized mine development expenditure was written down by $123.5 million to fair value of the Mt Cattlin assets. The mine development expenditure is the difference between the consideration paid under the acquisition of General Mining and the fair value of assets acquired at that time in 2016, and that's being amortized over the life of the asset.

Deferred tax assets were derecognized because there's insufficient forecast taxable income available to utilize the previously capitalized tax losses in Australia.

Moving on to the profit and loss, an EBITDA before inventory of $9.4 million. Importantly, though, as a result of the impairment, we expect significantly lower depreciation and amortization costs going forward in the profit and loss.

Two items in the P&L to note is the reduction in revenue, which is impacted by a 38% reduction in average selling price and a 50% reduction in sales volume when compared with the 6-month period of June 2018. As we have alluded to previously, the sales volumes are skewed to the second half of this year, and we expect revenue to increase significantly in the second half.

The other item to note on this page is within EBITDA includes a $10 million foreign exchange gain on the tax payment in Argentina. If you recall at December, we raised the tax provision. By the time we came to make the payment in May, the exchange rate moved very favorably in our favor.

We move on to the cash flow then. I'd like to focus more on the Page 11, which is the waterfall chart. We started with $24.8 million at the beginning of the period; we received $271.6 million in sales proceeds; and we paid $54.3 million in tax; netting $217.3 million in cash during the period from the POSCO sale. There was an inventory buildup during a period of $26 million as a result of shipping schedules being weighted to the second half of the year. We spent $17.8 million on CapEx during the period, including $5.2 million at Mt Cattlin; $18.2 million on investments during the period, resulting in cash at the end of the period of $176.3 million.

Moving on then to the balance sheet. A couple of items to note: inventory at the end of the period is $29.2 million; property, plant and equipment is now at $89 million as compared with $213 million last year; deferred tax asset is 0; income tax payable is 0; and the other item to note is that in accordance with the accounting standards, we've had to gross up the balance sheet for leases. So we've had a right-of-use assets of $28 million and lease liabilities offsetting that right-of-use asset of the similar amount.

Thank you, Simon. I'd hand back to you.

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Simon Hay, Galaxy Resources Limited - CEO [4]

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Okay. Thanks, Al. So moving on to Alita. We announced on Wednesday, we've purchased the senior secured loan facility for USD 31.1 million. This amount is made up of the principal, accrued interest, costs and early retirement fee, and gives Galaxy a first ranking security over all the Alita assets and the key subsidiaries.

Subsequent to that announcement, we engaged with Alita management on Wednesday and had what we thought were quite positive discussions. We presented a number of requirements and management was very receptive to these discussions and accepting of all the points that we raised. So that was how we started. Those requirements included a further standstill on the debt facility for another week to allow Galaxy to work with Alita to examine the business in detail and the options that were open to us. Without hearing back from Alita, the Alita Board then called in the voluntary administrators, and to protect our interest, we then appointed KPMG as receivers and managers yesterday.

So where we are today is we have some people on-site today with the receiver and manager, and we'll commence working with the receiver and manager and the administrator to examine all the options that are open to us. Once we have determined the course of action, we'll come back and explain what that is. We are not expecting that to be in the short term. We expect it will take a number of weeks before we have a clear picture on the course of action.

Moving on to the outlook. Production. Guidance remains intact Q3 so far, we're largely producing at the Q2 run rate, which is quite positive. In regard to shipping, 2 shipments have sailed, 44,000 tonnes in Q3 so far, and we have a third shipment of 15,000 tonnes locked away for mid-September, and there's a potential fourth shipment of another 15,000 tonnes in late September. We might not be able to fit that into September but hopefully we can. It's too early to give a look ahead to Q4, although we do have 1 Q4 shipment locked away already.

This week, I've been in China visiting a number of our customers and talking with downstream players. We've had a number of proposals discussed in China and Japan. We have a handful that we are considering and we aim to short list these opportunities in September, October and move forward into detailed discussions commencing with an MOU with 1 or 2 parties. So yes, lots of work still happening on the downstream front.

So far I haven't talked much about projects but both are progressing well, and we do expect to talk further in October, November about the key items and the 2 plants with both Sal de Vida and James Bay. Just quickly on Sal de Vida. Test work on the base case and the alternative technologies is progressing very well. We're on track to make flowsheet selections in early Q4. We did have the environmental license extended for another 2 years as well.

At James Bay, test work program results are in, and we're finalizing the assessment of that right now. Again, a similar timing to Sal de Vida, early Q4. We will have more to talk about in regard to that project. We are launching the IBA with the Cree Nation next week, the first official meeting. I did meet with the Cree Nation chief earlier in this month, and we agreed the process and how the IBA negotiations will continue -- will progress from here on. So quite a significant step there with the James Bay project.

The outlook in regards to the market remains very soft. The converters that we met this week, not running at full utilization and has spodumene stock in front of the kiln we'd estimate as probably twice their usual levels, so if they're holding 3 months -- normally 3 months supplies what they aim to keep in front of the kiln and they're holding approximately 4 months. So -- and this was across a number of converters. So I doubt we'll see any price recovery until that stock is worked down to more normal levels, and we would expect that towards the end of 2019 or early 2020.

Importantly, all major customers remain supportive. As you can tell from the shipments that we've locked away, both this quarter and discussions about shipments for next quarter. However, those customers, too, are experiencing weaker pricing for carbonate and hydroxide products as both products -- the pricing for both approach the RMB 60,000 per tonne level.

Importantly, on the long-term demand, their views remain unchanged. They're very optimistic, and discussions with further downstream users are quite positive on future orders and projects coming online. And so that, again, gives us confidence in the long-term thematic of lithium. We are seeing spodumene prices -- current spodumene prices in the low to mid-USD 500s.

So with that, operator, I can throw it open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question in queue is from Reg Spencer from Canaccord.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [2]

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A couple of questions from me. Firstly, just around your shipping and sales targets for the second half. Obviously, you previously guided that the second half shipments would be a lot higher. I was just wondering if you can provide any comment on your confidence in being able to hit not so much your September quarter numbers, but you implied guidance on December quarter. Obviously, as you alluded to, there's been some, let's call it, indigestion in the concentrates market, and just wondering how confident you are that your offtakers will actually take delivery and pay given those current market conditions?

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Simon Hay, Galaxy Resources Limited - CEO [3]

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Okay. Thanks, Reg. Look, the numbers I've talked about would show you that Q3 looks pretty solid. And our guidance of 60,000 to 70,000 tonnes remains intact. Q4, it's probably too early to ascribe any confidence level to where we see the numbers line. But I think what is quite positive is the key customers have already -- one key customer has already committed to a Q4 shipment. And there's another one that we have opened up discussions about timing. So that is quite positive.

Now this customer has a very good supply chain or downstream customer level, high-quality cathode producers and battery producers, so we're quite confident that this one will follow through. Some of the other customers, we will definitely have to meet the market on price, and the volume will depend on them working through their inventory levels. But again, discussions with these customers have been largely positive. And of course, we're talking not just with current customers, we're talking with other customers as well. So look, there is opportunity. I wouldn't say pricing, as I said, we'll have to meet the market and volume, too early to make a commitment on Q4 at this stage.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [4]

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Okay. That's great. The next question is around the cash. I just wanted to clarify that the proceeds from the POSCO sale are not restricted in any way, shape or form. You mentioned that they are held in U.S. dollars outside of Argentina. Is that correct? And does that mean that they are free to be used for whatever purposes that you guys see fit?

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Simon Hay, Galaxy Resources Limited - CEO [5]

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Look, basically, that is correct, Reg. We can repatriate them out of the Argentinian entity. There is a little bit of tax leakage with that. But we can certainly do that. So yes, we are unrestricted.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [6]

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Okay. So just to clarify, the cash is held in an Argentinian entity, but the cash itself is held outside of Argentina?

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Simon Hay, Galaxy Resources Limited - CEO [7]

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Yes, that's right.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [8]

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Okay. Last question from me is just interested in your comments around your assessment of downstream opportunities. Galaxy, I think, maybe 18 months ago or 12 months ago, at that time were assessing the possibility of toll trading with some customers or new customers. Is that the kind of downstream structure that you would be looking at? Or might it be something a little bit more significant like an investment in a converter plant or a co-investment with the current Chinese group? Or -- I'm just wondering if you could maybe elaborate that on if you're able to.

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Simon Hay, Galaxy Resources Limited - CEO [9]

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Yes, sure. It's more likely the latter than the former. Toll trading is never off the agenda, especially when there's surplus converter capacity available in China. But it -- we are more looking at taking a position in a converter, either new or existing, and having some equity participation in that, bringing spodumene supply or potentially brine product supply to that converter. So that's more what we're looking at.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [10]

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So that wouldn't involve any major expenditure on your part and any further impact on your cash balance? And that's more the provision of feedstock for that converters is how you would gain your interest?

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Simon Hay, Galaxy Resources Limited - CEO [11]

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That's certainly one of the options we're looking at, supplying spodumene in -- as an earn-in. There may be some investment but that would be some time away. It's not going to be this year. We are looking -- as I said earlier, we're looking at progressing discussions in early Q4. So these things will take a period of time before we would be able to talk about any sort of expenditure. So very preliminary, too early to talk about any sort of investment.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [12]

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Okay. And you might prefer not to comment on this. But with Alita looking like it may be put on care and maintenance, their offtaker, Jiangxi Special Electric, my understanding is that they source their feedstock only from Bald Hill. Maybe I'm being presumptuous, but is some of the downstream opportunities involving Alita's offtake partner which now seems to be void of any feedstock?

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Simon Hay, Galaxy Resources Limited - CEO [13]

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Look, I wouldn't want to comment other than to say that's an obvious opportunity we would look at.

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Operator [14]

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(Operator Instructions) Our next question is from Nick Herbert from Crédit Suisse.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [15]

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Three questions for me, please. I might start on lease from Bald Hill as well. Just interested in understanding what in that asset is of interest to you guys? Is it resource exploration, (inaudible) blending? And what you're seeing an opportunity that perhaps others haven't. And then by extension, it's a pretty sizable investment you've made now and it's sort of capital that's not available for developing Sal de Vida or James Bay. So just wondering if we take from that, that Alita now ranks above those opportunities in a portfolio context, that's question one.

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Simon Hay, Galaxy Resources Limited - CEO [16]

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Okay, Nick. Look, our original investment was around the resource, you're quite right. The exploration ground is -- seems to have some potential. Certainly, the product quality is well recognized in the market as one of the best. And the opportunities to blend do provide potential synergies, so that is of interest. Look, our -- when you talk about our investment now in Alita, the AUD 40-odd million that we've just recently bought the debt with is more around protecting our interest. We haven't yet made any decisions about what happens from here on. So -- and the next steps are for us to really understand that asset in great detail. So I think that is -- it's too early to say where it ranks in front of the other projects. Yes, just too early to answer.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [17]

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And next one's on sales. Thanks for the comments, very helpful. On the price side, the low to mid-USD 500s, and is that the best indication of price that we should be expecting for the second half at this point?

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Simon Hay, Galaxy Resources Limited - CEO [18]

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Yes, it is. Not sure what else you need.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [19]

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Yes. No, it's okay. Just thinking about -- and I guess, risk of that into Q4. And on that shipment that you referred to in Q4, what's the size of that one that's already locked away.

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Simon Hay, Galaxy Resources Limited - CEO [20]

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15,000.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [21]

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Okay. And then finally, just could you clarify the stockpile volume you have 30 June and the grade of that, please.

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Simon Hay, Galaxy Resources Limited - CEO [22]

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Alan, do you have those numbers at hand?

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Alan David Rule, Galaxy Resources Limited - CFO [23]

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We had about 59,000 tonnes of finished product at the end of June. The average grade was around about 5.85%.

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Operator [24]

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(Operator Instructions) But our next question is from Harsh Bardia from Citi.

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Harsh Bardia, Citigroup Inc, Research Division - Senior Associate [25]

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Simon, just wanted clarification on that spodumene price outlook. So low to mid-$500. In the Mt Cattlin write-down assumption, you have a price range from $577 to $692. So does it mean that we are seeing pricing bottoming out now, and increasing from 2020 onwards? What's your thought on that?

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Simon Hay, Galaxy Resources Limited - CEO [26]

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Yes. Look, I think the numbers, and I'll get Alan to talk further on what we've used in the impairment model. But yes, we certainly look forward out of this period of weakness, and we expect that prices will recover. So that's why there was a range there on the impairment -- the impairment calculations. In regard to has the price bottomed out, our thoughts are, it must be pretty close to the market bottom when you see Alita, obviously, in trouble and not able to operate at those levels. So yes, I don't think it can go much further. That's a projection. So -- but as I said, we do -- to make the sales in Q4, we will certainly be in discussions with our customers and lock those sales away.

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Harsh Bardia, Citigroup Inc, Research Division - Senior Associate [27]

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And just quickly on Sal de Vida. This flowsheet selection later this year, does it involve like CapEx estimates and capacity adjustments as well? Or is it more around like timing and the particular process Sal de Vida takes? What's the scope of that event?

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Simon Hay, Galaxy Resources Limited - CEO [28]

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Yes. The first part is the technology in the flowsheet. So we will have indicative costs at that stage. They will be relatively high level, on certainly figures of plus or minus 30%. We will move straight in from flowsheet selection into more definitive engineering estimates. We don't expect that to take too long, maybe another quarter or so. But yes, we will have indicative numbers in Q4, and more solid numbers probably a quarter later.

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Operator [29]

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Our next question in queue is from Warren Edney from Baillieu.

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [30]

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I've just got a couple of questions about the D&A and some restatements. In terms of the D&A in the P&L on Page 14, you've got $20.43 million, but in the segment number, it's $11.76 million. So just wondered, Alan, what's the difference there?

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Alan David Rule, Galaxy Resources Limited - CFO [31]

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The difference is the movement in the inventory adjustment. So what's shown in the notes is the amount that's been expensed into -- the $20.4 million is the D&A that's gone in there. But the difference between that and the $11 million is sitting in the net inventory movement in note 3. So that's...

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [32]

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Okay. And that's that -- the $27.7 million number, is it -- that's in credit to the cost?

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Alan David Rule, Galaxy Resources Limited - CFO [33]

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Yes, so included in that. Yes.

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [34]

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Fine. Now the other one was just in terms of doing some more adjustments sort of trying to back out the net number. You gave us the price tax underlying profit of $4.9 million. In trying to do some adjustments sort of trying to get back up -- I'm not quite sure whether there's actually a tax credit sitting in there or some other -- can you give us any ideas about what other adjustments we might need to make to sort of normalize or come to the underlying numbers without the impairment charges?

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Alan David Rule, Galaxy Resources Limited - CFO [35]

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Yes. So if you start with the loss of $171 million, you add back the impairments of $176 million gives you your $4.9 million. Included in that is the $10 million FX gain on the tax in Argentina, and there was a tax credit of about just over $2 million when we finalized the tax return in Argentina. Outside of that, the rest is straightforward.

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [36]

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All right. And final question. Is there any other parties that have got security over the Alita assets? Or is it just you?

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Alan David Rule, Galaxy Resources Limited - CFO [37]

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Just us.

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Simon Hay, Galaxy Resources Limited - CEO [38]

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Yes, just us.

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Operator [39]

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And our next question is from Rahul Anand from Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [40]

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I've got 3. If I can please start with recoveries long term. Just in line with your comments that you were mentioning before as well, the 0.1% recovery improvements -- sorry, 0.1% increase in lithium product grade leading to that recovery loss of 3%. Post the ramp-up of recovery improvement projects, are we still forecasting 60% in the long run? Or has that number moved? That's the first one.

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Simon Hay, Galaxy Resources Limited - CEO [41]

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Yes, there's -- a lot of those initiatives we have at Mt Cattlin on productivity are geared around recovery. So that's where we sit right at the moment, Rahul. But there is still ways to go, and there's still further improvement in the plant.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [42]

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Okay. Understood. So for our modeling, just confirming that we're happy to still keep the 60%.

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Simon Hay, Galaxy Resources Limited - CEO [43]

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Yes. At present, yes. Yes.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [44]

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Okay. And the second one is around cash receipts and cash flow from operations. So revenue was $28 million circa and receipts from customers coming in at about $19 million. Just wanted to touch base and see if there's been delays in payments there? Or is that sort of normal behavior and nothing to worry about there?

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Simon Hay, Galaxy Resources Limited - CEO [45]

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Rahul, that was a shipment about a week before the end of the half year. So by the time we lodged all of the documents and payments came in, that money came in the first week of July.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [46]

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Got you. Okay. And then finally, one for you again, Simon. The marketing arrangement that currently exists -- I mean, you pay a percentage on your achieved prices, and one would think that you get some form of benefit in terms of market access. Is that still an economic decision in your eyes, and you're still gaining those benefits in this market?

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Simon Hay, Galaxy Resources Limited - CEO [47]

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It's a good question, Rahul. Yes, we're in discussions with the marketing agent on that. That's as far as I would say at this stage.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [48]

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Okay. So it's just under review?

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Simon Hay, Galaxy Resources Limited - CEO [49]

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Yes.

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Operator [50]

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Our next question in queue is from Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [51]

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Look I just wanted to clarify a little bit on the -- your pricing commentary. So first half, your realized price was $584 but that's an FOB Esperance price. And then you've given us guidance for your impairments, which is the CIF price, and then you've given us guidance sort of low to mid-$500s. Is the low to mid-$500 the CIF price or an FOB price given where you were in the first half with FOB realization? And if so, what's the freight assumption embedded in that?

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Simon Hay, Galaxy Resources Limited - CEO [52]

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Yes. It is an FOB price, Glyn. The majority of our customers are FOB, so yes, that's certainly the number we're looking at. And freights, well, we achieve what's in the market at that time. It varies between $30 and $35 a tonne at the moment. There are pricing pressures, as you know, with environmental improvements to marine fuel oil, so we expect those numbers will rise in the near future. That's the sort of numbers we can work with.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [53]

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Okay. And then just if I look at the -- your long-term assumptions for your impairments. I mean even if you took the lowest price and the highest cost, you've got about a $100 margin. And with the depreciation write-off, why do you think you'll make no profit again to write-off the entire deferred tax asset? Or am I missing something?

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Simon Hay, Galaxy Resources Limited - CEO [54]

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Alan, do you want to handle that?

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Alan David Rule, Galaxy Resources Limited - CFO [55]

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Yes. Glyn, we've obviously worked through these numbers quite vigorously with the auditors and there was no basis on which we could justify to carry forward those tax losses.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [56]

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So even with $100 margin and written-off asset base, you still don't make a profit?

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Alan David Rule, Galaxy Resources Limited - CFO [57]

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Yes. But you're looking at a cash profit. There's also carryforward depreciation for tax purposes.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [58]

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Okay. So it's a cash issue. You might still write down a P&L profit but not a cash profit?

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Alan David Rule, Galaxy Resources Limited - CFO [59]

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No. We'll make a cash profit but not a taxable profit.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [60]

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Okay. All right. And then just where does that put costs in? So when you look at your costs, so really, it's -- you're thinking of, if you took $30 to $50 off that, the price maybe inflate a little bit, that's sort of where your FOB cost sits, and that's inclusive of your assumption around royalties and everything else as well in that future cost of production number?

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Alan David Rule, Galaxy Resources Limited - CFO [61]

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Yes.

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Operator [62]

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And our next question is from Adam Ritter from Alceon.

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Adam Ritter, Alceon Group Pty Limited - Director [63]

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Just curious, in light of your comments on the spodumene inventories at the converters, if you have any insights regarding inventories of their finished products as well? Are they long a lot of products over there?

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Simon Hay, Galaxy Resources Limited - CEO [64]

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Look, Adam, that's probably a little bit more difficult to get a read on. Just anecdotally, warehouses we could see, yes, there was some product around. It would look like a couple of weeks of production so they didn't seem to be warehouses weren't burning and full of production. But there was product evident on the ground.

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Adam Ritter, Alceon Group Pty Limited - Director [65]

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Okay. And what's your sense of the cash cost of some of these marginal converters? I mean are you getting the sense that people over there are starting to shut down with prices down at these levels to cover that?

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Simon Hay, Galaxy Resources Limited - CEO [66]

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Look, it's pretty obvious that the converters are also under pressure. So as I said, they're not fully utilized. And where their profit margins are at this stage, we don't have a complete read-through, but it's very, very clear, though, we're very forward in their discussions this week about the pressures they're under as well.

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Adam Ritter, Alceon Group Pty Limited - Director [67]

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Yes. Okay. And then just lastly, on that pricing guidance, is that sort of a 6% headline price or what you expect to receive? Or it's probably not that much different...

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Simon Hay, Galaxy Resources Limited - CEO [68]

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Sorry, can you say that again, I didn't...

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Adam Ritter, Alceon Group Pty Limited - Director [69]

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Your price guidance, is that for sort of headline 6% product or what you expect to realize? Or is it not that much different than the December quarter?

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Simon Hay, Galaxy Resources Limited - CEO [70]

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Yes, it's more for a 6% product? Yes.

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Operator [71]

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There's no more further questions from the telephone lines. I'd like to hand the call back to the speakers for any closing remarks. Please go ahead.

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Simon Hay, Galaxy Resources Limited - CEO [72]

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Okay. Thanks, everyone, for joining us today. Look, I think my closing comments are that Galaxy is still -- is situated in a pretty solid position compared to lots of our peers. We have cash in the bank even after the outlay on the Alita debt purchase, making positive cash margin on current pricing even as the market is very soft and spodumene is in oversupply, and we have the projects -- high-quality projects yet to be developed, which we'll be talking about in greater detail in the fourth quarter. So difficult conditions, but Galaxy is certainly in a strong position right at this stage. So thanks again, everyone, for joining us. Speak to you soon. Bye.

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Operator [73]

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Ladies and gentlemen, that does conclude the call for today. Thank you to all participating. You may all disconnect. Goodbye.