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Edited Transcript of ORE.AX earnings conference call or presentation 23-Aug-19 1:01am GMT

Full Year 2019 Orocobre Ltd Earnings Call

MILTON, QLD Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Orocobre Ltd earnings conference call or presentation Friday, August 23, 2019 at 1:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Hall

Orocobre Limited - Business Development Manager

* Martin Perez de Solay

Orocobre Limited - MD, CEO & Director

* Neil Kaplan

Orocobre Limited - CFO & Joint Company Secretary

* Tara Berrie

Orocobre Limited - Commercial Executive

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Conference Call Participants

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* Bria Murphy

BMO Capital Markets Equity Research - Associate

* Chris Cahill

Quest Asset Partners Pty Ltd. - Founding Partner

* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and 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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Thank you for standing by, and welcome to the Orocobre 2019 Full Year Results Briefing. (Operator Instructions)

I would now like to hand the conference over to Mr. Martin Perez de Solay, Managing Director and CEO. Please go ahead.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [2]

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Thank you, Lexi. I would like to welcome you all for Orocobre's Financial Year Results Briefing for the year ending June 2019. I would like to open the call with some comments on safety. As I will discuss in more detail later on, safety is the first of the areas of focus for our business. I am certain improvements in safety will lead to improved operational and financial results.

The operations achieved a TRIFR of 3.5 at Olaroz and 3.8 at Borax for FY '19. These results are slightly worse than FY '18 as we had a number of incidents in the first half of the year. However, some of this also relates to improved reporting. Safety must be a focus at Olaroz as we move into inherently more risky construction activities.

At Olaroz, the number of safety operations in audit have been increased to ensure that all proper safety procedures are being fulfilled by both Sales de Jujuy staff and contractors. At the end of June, the Borax Tincalayu mine had achieved 795 days without an LTI and the Sijes mine had achieved 137 days without an LTI. A single LTI was recorded at the Campo Quijano plant at the start of April, and following that, Campo Quijano achieved 89 days without an LTI to the end of June.

Moving on to Slide 4 and the results for financial year 2019. Neil will shortly explain the financial results. But I am pleased to report that despite tough market conditions, the lithium business remains a low-cost, high-margin producer. And Orocobre recorded an underlying profit of $24.8 million and a group statutory profit of $54.6 million. The Olaroz Lithium Facility achieved a total production of 12,605 tonnes, which was up slightly from the previous year. We continue to follow our strategy of managing brine concentration to minimize impacts of weather, such as the lower-than-average evaporation rates that we experienced earlier in the year.

We have also continued to build new pumps on Stage 2, and this will now begin to contribute concentrated brine for Stage 1 and help us to better increase production and the proportion of purified carbonate. We are fully funded to complete Stage 2 Expansion at Olaroz with the finalization today of a $180-million debt facility with Mizuho Bank secured by JOGMEC.

Leveraging on the incremental pond area, we expect that production will be at least 5% higher than FY '19, and we'll provide a further update at the AGM. In terms of markets, we're still contending with low market prices of approximately $7,250 per tonne for the September quarter. We will discuss this further, but we remain confident in the medium- to long-term outlook for lithium.

Finally, Borax continues to operate at or near all-time low unit cost of production and has managed to generate a small operating profit to improve sales performance.

Thank you, and I will now hand over to Neil to run through the financial results.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [3]

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Thank you, Martin, and a good morning to all. First up is the Orocobre and Olaroz joint venture structure slide. Orocobre has a 72.68% ownership in Sales de Jujuy Pte, which in turn has a 91.5% interest in Sales de Jujuy S.A., giving Orocobre an effective 66.5% increased interest in SDJ S.A.

One of the transaction terms wherein Toyota Tsusho bought 15% of Orocobre in early 2018 was that Orocobre would gain control of Sales de Jujuy S.A., which would then allow Orocobre to consolidate SDJ S.A. as opposed to equity accounting it. From 1 January 2019, Orocobre has consolidated SDJ. The statutory financial statements show 1 July through 31 December 2018 of the financial year being equity accounted, and 1 January to 30 June 2019 being consolidated. In order to show what the full FY '19 and comparative FY '18 would look like, we have produced a consolidated Profit & Loss balance sheet and cash flow in this presentation.

Moving to the next slide, this slide details the consolidated Profit & Loss. The reduction in pricing has been the main contributor for lower revenues, with an average FOB price of USD 10,322 a tonne being received. Olaroz cash operating cost of $4,302 per tonne are materially the same as FY '18 of $4,194 a tonne, excluding royalties, export duties and head office cost, despite the increased sales of purified product. A bridge of EBITDAIX from FY '18 to FY '19 can be seen in the upcoming slide.

Gross cash margins remain robust at $6,020 a tonne or 58%. EBITDAIX includes $8.5 million related to export duties, and $5 million of noncash costs related to accounting for a change in control of Olaroz. Depreciation costs of $974 a tonne versus FY '18 of $741 a tonne included the amortization of the uplift in value resulting from consolidating SDJ. The $50.7 million gain on consolidation is a once-off noncash accounting gain as a result of Orocobre obtaining accounting control of SDJ Pte group from 1 January 2019, given the assets have to be fair value.

Foreign exchange losses relate to VAT balances, which are Argentine peso-based, and the effect of the U.S. dollars strengthening against the Australian dollar and Argentine peso. The share of losses of associates relates to Advantage Lithium and the Naraha Lithium Hydroxide Plant. The income tax benefit represents a reserve -- a reversal of dividend withholding tax to foreign shareholders of $13.1 million, $6.9 million due to the unwinding of the deferred tax liabilities related to the lowest statutory tax rate, 25% versus 30%, partially offset by foreign exchange differences. This resulted in a statutory profit after tax of $65.4 million.

Moving on to the next slide. This slide details what our underlying profit is. In moving from the statutory profit of $54.6 million to an underlying profit of $24.8 million, we have made the necessary adjustments as detailed on the slide. The underlying profit of $24.8 million for FY '19 is approximately 4% down from the FY '18 $25.7 million underlying profit, which is mainly due to lower average lithium prices received, the introduction of an export duty during FY '19, slightly higher costs largely offset by lower tax expense, lower depreciation and higher finance income.

Moving to the next slide, this slide details the bridge between EBITDAIX for FY '18 of $86.7 million and the FY '19 EBITDAIX of $54.1 million. The main component of the reduction is related to the lithium pricing of $27.3 million and the export duty of $8.5 million, which was introduced in September 2018, with operating costs remaining well controlled. Whilst the lithium pricing and export duty have had a substantial effect on the reduction, EBITDA and the operating margin have remained strong.

Moving to the next slide. This slide details what the consolidated balance sheet looks like for FY '18 versus FY '19. The column on the right for FY '18 is what the consolidated balance sheet would have looked like before fair valuing the balance sheet due to consolidation, and the middle column shows what the balance sheet would have looked like in FY '18, including the fair value uplift which occurred during FY '19.

The key points on the balance sheet are: Cash is reduced given the funding of Stage 2 Expansion. Inventory has increased mainly as a result of higher brine and finished goods inventory. Property, plant and equipment has increased as a result of the fair value uplift related to consolidation and CapEx related to Stage 1 and Stage 2 Expansion. Investment in associates has increased due to the investments in the Naraha Lithium Hydroxide Plant and Advantage Lithium.

Internal borrowing continues to reduce. The principal on the Stage 1 project finance loan has reduced from $191.9 million to approximately $110 million at 30 June and, in 2 weeks' time, will have reduced to approximately $99 million. Increasing net deferred tax liability is mainly due to the tax impact on uplift from consolidating SDJ, the reduction in carried forward tax losses partially offset by the unwinding of the dividend withholding tax liability and reduction of lower statutory tax moving from 30% to 25%.

Moving to the next slide. Cash generated from operations remained strong but lower than previous year due to the lower average sales price received and export duties. In detailing some of the main movements, net VAT changed from an inflow to an outflow year-on-year due to expansion in CapEx, lower sales and [partly] government liquidity resulting in slower repayments. The purchase of property, plant and equipment relates to sustaining an expansion CapEx. Investments in associates represent our capital injection into the Naraha Lithium Hydroxide Plant and participation in the Advantage Lithium private placement.

Repayment of borrowings is the reduction of the principal for the Stage 1 project finance loan. Loans from the shareholders received are from TTC to SDJ. In summary, a reduction of $55.8 million of cash which, in high-level terms, is a result of the CapEx spend of $56.6 million.

Thank you, and I will pass you back to Martin.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [4]

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Thank you, Neil. On Slide 12, I thought I'd go briefly discussing Argentina. Things have been quite volatile over the last week or 2, and while we don't know the outcome of the national elections until October or November, it is worth pointing out that our recovery has been working in Argentina with both major projects in government at different times. We remain confident that either side of politics will be supportive of a strong lithium industry and exports in general. Also, we have seen from history that while currency and inflation can move considerably in the short term, they tend to cancel each other out over time.

On Slide 14, I have summarized how we intend to be a world-class supplier of lithium chemicals. We will continue to develop a deep understanding of our business with a focus on safety, quality and productivity. Our existing strategic initiatives remain intact with a focus on improving production from Stage 1, delivery of Stage 2 Expansion, development at the Naraha Lithium Hydroxide Plant and development of the Olaroz basin and the very large lithium resources that it contains. We're also making some changes to our organization that will improve our management bandwidth and capability, which would help us to deliver on our mission.

Moving on to Slide 15. We're operating in a difficult market environment, and we've seen a sharp price reduction and demand that is below expectations, creating an overhang in the lithium chemicals market. At the same time, battery technology is changing rapidly and customers' quality requirements are becoming more demanding. In this context, our strategy is to leverage our key competitive advantage, which is being a low-cost producer of lithium carbonate and to become a world-class supplier of lithium chemicals operating at the bottom of the cost curve. The outcome of this strategy is reflected in the profit margin.

As I mentioned earlier, the cornerstone of this strategy is safety, and we will continue to improve our safety performance with implementation of best practice DuPont systems. My aim is that we will be a company with strong cultural safety because I know that it leads to the necessary improvements in quality and productivity. Safety and sustainability are increasingly important for our customers who want certainty in respect of ethical sourcing practices. In Olaroz, we're undertaking a number of quality-related projects to ensure we continue to evolve with our customer base. All of the quality projects have the potential to deliver better prices for our products.

We have been working on productivity improvements which will deliver reduced costs through the lower use of reagents and better recovery of lithium throughout the process. We're also working to gradually increase our production of purified lithium carbonate. Additionally, the early delivery of Stage 2 ponds will see extra evaporation and storage areas to help minimize the impact of weather and minimize production variations on a month-to-month basis.

Considering that we're focused on safety, quality and productivities, the priorities for improved operational performance at Olaroz Stage 1 are detailed on Slide 17.

Brine quality will be improved to deliver higher lithium concentration and lower impurity concentration. Improved pond management practices are paying off with higher-concentration brine in each prior corresponding period. Plant management will be key to deliver better results and development of new products in a landscape of changing customer needs.

Moving to Slide 18. In FY '20, we aim to increase production and decrease overall cost so we can maintain and improve our current margin. This cost and production focus is essential within the current market conditions. We actively undertake maintenance at Olaroz during lower operation periods of the year to minimize the financial and production impact. This year, we're undertaking maintenance of the main reactors, which is expected to deliver further quality improvements. We expect the downtime to be offset with improvements in the plant efficiency and pond management.

Moving on to the lithium growth projects. We start on Slide 19 with the Olaroz Stage 2 Expansion, which will supply up to 10,000 tonnes per annum lithium carbonate feedstock to the Naraha Lithium Hydroxide Plant. Plus according to the same capacity, it will provide up to 15,000 tonnes per annum of high-quality, low-cost, primary-grade carbonate to new and existing customers. Construction is well underway with a number of ponds already filled and in operation, and we're incorporating all the lessons learned from Stage 1 into the Stage 2 design. At this plant, we will only produce primary-grade carbonate, and the operating costs are expected to be lower than those of Stage 1.

Moving on to Slide 20, the capital for expansion project is fully funded with existing cash and the announcement today of the completion of a debt facility with Mizuho Bank. The total facility for $180 million will have an interest rate and terms similar to the Stage 1 finance facility. One thing to note is that under the terms of the capital raise with TTC last year, Orocobre is required to hold approximately $135 million in cash from deposit until completion of this project. This cash will be available for cost overruns and other defined events of the expansion. Once completion has occurred, JOGMEC will assume 82.35% of the guarantee obligation, and that proportion of term deposit will be returned for corporate purposes.

On Slide 22, during the final quarter of the year, we announced that Orocobre, Toyota Tsusho Corporation and Joint Venture Boards have approved the Final Investment Decision for the Naraha Lithium Hydroxide Plant to be built in Japan. Since then, as you can see on the slide, official groundbreaking has occurred, and the construction is now underway. Veolia will build the plant, and commissioning is currently expected to commence in the first half of calendar year 2021.

The Naraha Lithium Hydroxide Plant will further cement our position as a global lithium chemical producer operating at the bottom quartile of the lithium cost curve. This plant will be the first of its kind in Japan and will provide us further diversification suitable for different battery technologies. It will also provide the opportunity for significant margin growth on our primary lithium carbonate being converted to battery-grade lithium hydroxide. And importantly, the plant is very close to an existing cathode manufacturer and plant -- battery manufacturing facility.

Moving on to Borax Argentina on Slide 24, it has continued to demonstrate improved sales performance with their business development projects being converted into sales growth. Total tonnes sold were the best Borax have done in the last 6 years, even after deducting low-value mineral sales. The business is operating efficiently with unit cost control at or near record lows.

Sales revenue is up nearly 15% year-on-year, and EBITDAIX is positive $200,000. Several long-term contracts have been secured with strategic corporate customers which should help continue to deliver better results.

That concludes the operational review, and I will now hand over to Tara to discuss our views on the lithium markets.

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Tara Berrie, Orocobre Limited - Commercial Executive [5]

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Thank you, Martin. I'll begin the market section on Slide 26 by discussing shift in trade flows and pricing. Over the course of FY '19, we have seen chemical prices in a seaborne and China domestic market converge as China's demand growth slows and the country's macroeconomic factors began to impact the broader global lithium market. Following the initial decline in 2018, China's domestic prices were placed under increased pressure by a more stringent EV policy incentivizing higher battery energy density and range, requirements that could not easily nor quickly being met by China's domestic battery supply chain.

In addition to these market-related factors, China's decelerating economic growth and escalating trade tensions with the U.S. raise concerns of the current account deficit due to trade imbalances. With this in mind, the Chinese factory supply chain began to destock. During the December quarter, China became a net exporter of lithium carbonate for the first time in over 8 years, further encouraged by a price arbitrage toward the seaborne market and a reduction in the VAT from 16% to 13%. Chinese suppliers targeted markets traditionally served by South American producers, including South Korea and Japan, resulting in a significant inventory build. In response, ex-China markets sought out slower shipping rates. As a result, South American suppliers commenced trade with China but at significantly discounted levels to meet domestic market prices.

Pricing in the seaborne supply to the Chinese market and declining prices created more challenging conditions for the Chinese conversion industry. Whilst spodumene prices declined significantly throughout the year, many Chinese conversion plants still held inventory of earlier higher-priced shipments. In an endeavor to reduce working capital, Chinese conversion plants began to destock, requiring Australian hard rock producers to immediately delay shipments, restructure offtake agreements and moderate plant production to manage inventory at the mine site and local warehouse facilities.

Moving on to announced versus delivered capacity on Slide 27. Throughout FY '19, hard rock producers' endeavors to ramp up operations was met by resistance from converters, who had struggled to bring on announced conversion capacity. The factors contributing to the differential between announced and delivered conversion capacity remain the same as in the past: underestimated project and ramp-up timelines, inconsistent or varied feedstock and lack of experience and technical knowledge.

While new and independent converters were most susceptible to these factors, integrated converters and brine operations also reported slower-than-expected expansions. Just over 50% of announced new capacity for 2019 has been released to the market so far this year, and much of this new production is still under customer qualification.

Now taking a look at the industry costs on Slide 28. As prices persist at levels lower than many expected, it has never been so important to be a low-cost, integrated lithium producer. In a recent note, HSBC estimated that approximately 50% of 2025 supply is uneconomic at current prices, which primarily impacts new projects using feasibility pricing well above current levels. Our research suggests that approximately 15% of current supply is operating with costs above prevailing market prices.

Independent converters remain the marginal suppliers to the market despite reduced spodumene prices. As previously mentioned, the cost of production to some converters remains elevated due to spodumene inventory purchased during the higher-price environment. But while industry expansion has come under pressure, lengthy projects and ramp-up timelines in addition to extensive customer qualification periods leaves the market vulnerable to a supply shortfall, given long-term demand fundamentals remain strong.

Now moving on to demand on Slide 29. A demand driver that is underestimated by much of the market yet continues to add pressure to car manufacturers is the carbon footprint of their supply chain and the penalties that will be imposed in the not-so-distant future. The more stringent and sizable penalties for carbon emissions in the European Union will be imposed in just 16 months.

Under the new regime, a penalty will be imposed for vehicle emissions over 95 grams per kilometer, which compares to the current industry average of 118.5 grams. If the 2021 regulation was in operation in the European Union just last year, major car manufacturers would've been penalized a total of almost USD 40 billion. As a result, car manufacturers were highly collaborative with upstream raw material suppliers as, for many, the potential carbon emissions penalties dwarf the cost of failing to invest in rechargeable battery and EV manufacturing facilities.

Now finally on Slide 30. We take a look at how the supply and demand factors drive our forecast. Orocobre's view on medium- to long-term supply is underpinned by overstated capacity claims and underestimated projects ramp-up and qualification time lines. Our view on demand has been instilled by downstream car manufacturers' commitments in battery capacity expansions. While there will be periods of market imbalance both on the demand and supply side, the company forecasts market growth of over 17% CAGR to 2021.

And now I will pass it over to David Hall, who will discuss Orocobre's commercial direction.

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David Hall, Orocobre Limited - Business Development Manager [6]

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Thank you, Tara. In relation to our current situation and our commercial direction, currently, we have a high exposure to the Chinese market. And this is disproportionate to our longer-term goal and historical position where we have had a more even geographic spread of customers. This has had an impact on our weighted average price.

In regard to the future, the target for long-term customer contracts is for 50% to 70% of volume to be secured under longer-term arrangements. These contracts will predominantly be strategically important customers across the different market segments. Discussions on these arrangements are at different stages of progress, and current market conditions have delayed the timing of decision-making with some customers. We expect to make further progress on these discussions and conclude some arrangements during the traditional annual contracting season in the coming months. These longer-term arrangements will have diversity in commercial terms, which will mitigate the degree of risk of market volatility and provide better predictability of revenue and margins.

In regard to joint marketing, in the past financial year, we formalized a joint marketing agreement with TTC, which provides for more direct involvement of Orocobre in marketing activities. This improves cooperation and clarity between ourselves and TTC in the planning and execution of market plans and in customer engagement.

We're also on the final stages of recruiting an Orocobre manager to be based in Japan.

That concludes the commercial summary, I will now hand back to Martin.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [7]

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Thank you, David. In summary, Olaroz remains a low-cost, high-margin margin producer despite current market conditions. We believe the medium- to long-term market fundamentals are intact. We are profitable and fully funded to deliver our growth projects at both Oloroz and Naraha, and we have a clear vision and focus on continually improving our operational performance. Olaroz will continue to grow into a world-class lithium chemicals supplier, delivering improved returns to our shareholders.

Thank you, and I will now hand back to Lexi for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first phone question is from Reg Spencer with Canaccord Genuity.

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

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I've got a few, but I might start with Argentina. I was just wondering if you could provide some comments on the possible shorter-term impact to your cost base from local inflation. I know you guys have said repeatedly over time that over the long term, inflation and devaluation cancel each other out. But obviously, there are short-term impacts and variabilities. What are you seeing in terms of the impact on your fixed costs at Olaroz from current inflation?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [3]

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Thank you, Reg. The -- as we said before, what we used to see in Argentina is that in the long term, inflation -- exact time Orocobre saw [the]impact of devaluation. What we have seen on the last week is a devaluation of approximately 30%. It's narrowing down. If you look at the numbers as of yesterday, that devaluation was reduced to something like 27% because -- as it getting to rain again. The impact on our cost basis on the part of peso-based, which are mostly salaries. And because all of our reagent costs and energy cost, since we generate our energy with oil, are highly dollar-related. So that impacts slightly less on half of our cost base.

And Neil has run some detailed numbers. He can tell you some more details about it.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [4]

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Yes. Reg, we've already done some fiddling around with that. I mean it's an immediate impact, and we got to see how things transpire over the coming months given the elections in October. But with that devaluation, obviously, as Martin was saying, we've got roughly 45% in Argentine peso. That will give us an uplift immediately. There's probably right as of now a $200 to $300 effect on our cost per tonne in a positive way. You've also got -- if you remember when the export duty came in, it was about 8% of sales. That's ARS 3 per dollar. If you take the new exchange rate, I think the peso is trading around ARS 55 to USD 1 today. That produces at about 5.5%.

So there are short-term benefits to be gained. Obviously, you do have devaluation of our peso-based assets and liabilities. So I think everyone knows with regards to that, we've also got to assess losses carried forward which are on asset. It affects that. But then you've got payables, peso payables from one day to the next. You get an immediate benefit on that. However, you do have the catch-up once inflation starts catching up.

So it's got to be monitored carefully. It changes from week to week. It's dynamic. And for us, there's an immediate benefit.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [5]

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Okay. That's positive. Just running with a similar theme and the short-term impact from cost and margins, maybe one for Martin. Just your production strategy. I know previously you guys had suggested that you may look to do limited runs of purified product when weather conditions permit. I'm just wondering your pricing guidance for the September quarter, does that include any material volumes of purified product? And going on from that, are you able to provide any sort of longer-term directional guidance as to where you think your purified volumes might track and what impact that might have on average pricing?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [6]

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Number one is the purified would be sold in this quarter has already been produced. So there's a mismatch between sales and production. We produce according to our brine quality, and we sell according to our customer requirements. So we manage that with the stock that we keep within the company. We are continuing to focus on running more purified product during this year as we expect to increase the share from what we produced last year moving towards our quality strategy.

I think David can tell you a little bit more about the product split between purified and primary [core] for the past quarter and for the past year and what we see for this quarter.

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David Hall, Orocobre Limited - Business Development Manager [7]

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Yes, Reg. Last year, the split between prime and purified was 73-27 in percentage terms. So we're looking to shift that more towards more purified product in FY '20. For this September quarter, the proportion of purified product will be relatively low. It will be around the 10% mark. But moving into the December quarter, that percentage will actually increase.

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

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Okay. So from that, I gather that you'll get a bit more color from your contract negotiations looking into calendar '20 then. David, is that fair to say?

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David Hall, Orocobre Limited - Business Development Manager [9]

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Correct, Reg. As you know, we're moving into the traditional annual contract negotiation season over the next 3 months or so. So we'll have a much better view on the wrap-up for the December quarter and, certainly, what our calendar year 2020 is looking like once we get a little bit further down the track.

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Operator [10]

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Your next phone question comes from Rahul Anand with Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [11]

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Look, I might start with the first one on the additional ponds and sort of the production trajectory. If I may, how are those additional ponds coming online at the moment? I take it all of them would be full of brine at the moment, but how many of them are now ready to harvest? And what I wanted to really get to is, how much of the additional brine that you've been planning is available within that FY '20 year for you to be able to use? That's the first one, and then I'll come back for the second.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [12]

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Okay. Well, thank you, Rahul, for your question. It's -- answering your question requires a lot of things to be considered and factored in. Regarding harvesting ponds, we completed the harvest of the ponds of Stage 1, so we don't expect to harvest more ponds from Stage 1 for the next couple of years.

The ponds for Stage 2 are being built as we speak, and we already have something like 10% to 20% of the total pond capacity being -- starting to be filled in and used for Stage 1. Our production forecast for the year benefits from the usage of these ponds, initially, until the first quarter of next year, in which we will start to fill the ponds for the secondary -- for -- excuse me, for the expansion project.

Also, the production forecast incorporates a significant -- incorporates certain conservatism. What we did is what -- we looked at the evaporation rates over the last 3 years, and we picked the lower evaporation rate for every single month. So when you look at the production forecast that we have put in together, what it considers is it does consider using the -- some of the ponds from Stage 2 as they become operational, reusing them for Stage 1 during the part of the year, not throughout the whole year. It incorporates a conservative operation rate, based on the experience that we have from the last 3 years. And it also incorporates the month of August and February running at a lower production rate since we are undertaking major maintenance of the 2 main reactors that we have at the plant. So all that has been incorporated into the production forecast for the year.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [13]

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Right, okay. And then Martin, if we move into the time then when Stage 2 starts producing and you lose some of these ponds that are being utilized in Stage 1, then how does the Stage 1 production look?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [14]

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Well, it will depend on the -- how...

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [15]

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I'm talking about the brine level.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [16]

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Yes. It -- we are making lots of changes, as we speak, to the pond management system. I will tell you we're starting to see, as I said in the presentation, that those changes are paying off. We are seeing better brine concentrations with lower evaporation rates than we saw in comparable periods.

We also have -- are working on -- the focus this year is focusing on the profit that we are making, improving the margins and improving recovery grades at the plant, also reducing the cost of -- the usage of reagents. Once we factor all that in, we should be able to tell you how that is going to impact in the long run. We think that running both systems together should provide us a more stable brine coming through the year, and that is something that we will learn as we start to operate the whole system with all the ponds jointly operated.

Difficult to tell you a number today. I think it's just important to say that we maintain our objective to -- by the time we have Stage 2 in operation, Stage 1 should be at full capacity, as close as possible to the expected capacity for that stage, and also focusing on purified production.

We are factoring the worst. It has been a discussion for some time about an evaporator being used. What we are doing is analyzing the use of evaporator for both stages being pooled together, Stage 1 and Stage 2. That should bring economies of scale, not only in the size and cost of the evaporator, but also in the OpEx of such an equipment. That equipment, we don't need it during this year because we will leverage on the additional pond capacity. But it is something that we are thinking of for 2021.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [17]

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Okay. And I take it's probably too early to start talking about CapEx and benefits of that yet.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [18]

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Yes.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [19]

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Okay. All right, I'll move on to the next one then. In terms of Borax, now that you're -- you've taken charge, in your mind, what is this asset to you? I mean, does this still stay a core asset to the Orocobre business? And how do we think about -- I mean there is production guidance today that's an improvement, but we still don't have much clarity on margins. And at the end of the day, it hasn't really made much for a very long period of time. What are your views and thoughts about how this business fits into the wider sort of Orocobre Group?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [20]

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The first action in Borax was to stop the bleeding. We had a company that was losing money, and we wanted to put it in breakeven and start making some money, which is what we are doing now.

Clearly, when you look at growth expected of the borates business against the lithium business and when you look on how to allocate your CapEx, usually, what you do is you allocate your CapEx to the largest growing business, which is the lithium business. So in that regard, what we are doing with Borax is, initial stage, was to get the company back in black numbers. And from there on, we'll continue to work to continue to improve or see where -- it's a difficult market environment for borates and lithium today to look into more, how do you say, more large business ideas or business schedules. Initial objective, which was to make it to profitable basis, was achieved. And now we have to continue to improve from there.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [21]

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Okay. So just confirming. So you are expecting the business to be profitable this year?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [22]

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Yes.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [23]

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Okay. Brilliant...

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [24]

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On a very narrow margin. As you know, as this year continue to improve, but you will not see a shot in profit coming out from Borax this year. The borates market continues to be complicated in terms of competence and price predictions.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [25]

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Yes. No, that will be a good outcome if we can get it to breakeven and sustain it there. Final question then. If we talk about South American exports, there were some news items that came out of China from some trusted sources that I follow that there were some unpurified exports even coming from majors that produce in South America that then have to be reprocessed by some of the producers or converters rather in China. Are you seeing a similar trend, I guess, in the market that a lot of the brine producers are somewhat struggling to produce purified product. And, because of that, just exporting unpurified and getting the Chinese to convert it? And how -- what do you think about that as a potential trend into the future?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [26]

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One -- you have to think of that question in several aspects. One is that the margin for more value-added products has narrowed, and some producers have decided to sell their low-value products straight away without being processed at their facilities.

Others, regarding the cost of reprocessing in it, I think that Tara is much better prepared to answer that question than what I am.

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Tara Berrie, Orocobre Limited - Commercial Executive [27]

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Just expanding on what Martin said. I suppose the most obvious example of that would be SQM. And SQM, what we've seen is that they shifted their mix further towards carbonate versus hydroxide. And our view on that is that they are -- they're using, I guess, what they would usually use to process carbonate into a hydroxide and using that -- and sending that, which is unpurified, into China. So we -- yes, we agree with what you're seeing and what you've said there.

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Operator [28]

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Your next question comes from Joel Jackson with BMO Capital Markets.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [29]

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This is Bria Murphy on for Joel Jackson. I'm just wondering if you can talk about your contract strategy moving the long-term contracts and your ability to secure these longer-term contracts, as your output grade varies between kind of purified and primary grade.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [30]

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Thank you, Joel (sic) [Bria], and let me pass that on to David. He's been talking about that.

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David Hall, Orocobre Limited - Business Development Manager [31]

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There's probably a number of moving parts within that question. I'll attempt to address each one of them. In terms of the different product grades, we've had discussions underway with quite a number of customers across the different market segments in terms of longer-term contract arrangements. And these will be different in each customer case, largely related to the way that the customer runs their business and how they manage their risk in potentially, back to back, these contract arrangements with their own customers. So it's certainly not a one-size-fits-all type of scenario. And obviously, customer requirements in terms of impurity control can vary, not only within the battery materials market but also across those industrial and technical markets as well.

So in summary, we've had discussions underway with quite a number of customers now for some time. Given the current state of the market, it's understandable that the progress on those discussions has slowed temporarily, given customer situations with high inventory levels and them reworking their own forward forecasts. But one thing I can say is that we've seen some positive signs from some customers in terms of increasing the volume requirements, not only the December quarter, but moving into calendar year 2020.

So we're quite comfortable, I suppose, with how those discussions are going. And we're looking forward to heading into the next sort of 3-month period, which is the traditional annual contract cycle and concluding some of those arrangements. But as we mentioned in the presentation, the longer-term strategy is to get a percentage of somewhere between 50% to 70% on the longer-term arrangements.

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Operator [32]

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(Operator Instructions) Your next phone question comes from Warren Edney with Baillieu.

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [33]

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I just wondered if you could just explain a bit about how the ramp-up and commissioning at Stage 2 and the hydroxide plant work. I mean is it one of these things where you can wrap them both up together? Or do you have to have the Stage 2 ponds already and, potentially, I guess, the evaporator all back online -- all online before you can process the -- ramp up the hydroxide plant? Or would you buy feedstock for the hydroxide plant as part of the ramp-up?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [34]

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Well, thank you for your question, Warren. The plan is to ramp up both plants together so that the lithium carbonate primary grade being produced in the expansion is the feedstock for the Naraha plant. However, the Naraha plant can operate from lithium carbonate produced from Stage 1, which we are currently commercializing for the customers. So there is not a need for such a thing. However, the plan is to ramp up both plants together starting somewhere in the first half of 2021.

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Warren Edney, Baillieu Holst Ltd, Research Division - Equity Research Analyst [35]

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Okay. And obviously, it's too early to tell exactly because you don't even know what the weather's going to be like in 2021. But is there a plan for how long that would be? Is it sort of an 18-month period or 12 months?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [36]

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Well, we are completing the detailed analysis of the expansion projects, and the ramp-up is the last part of detailed engineering that you do. I aim to have a ramp-up period of roughly 12 months to try to see and understand what the production capacity of Stage 2 is going to be. Usually, you see -- you define nameplate capacities after you complete the ramp-up period, which is what we are trying to achieve with Stage 2.

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Operator [37]

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Your next phone question comes from Glyn Lawcock with UBS Investment Bank.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [38]

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Just wanted to go back to the production guidance and the production itself. I mean it's been 4 years now, and we're still well short of Phase 1 nameplate. And you've got some ponds on operation now that belong to Phase 2. Just want to be clear, do you feel comfortable that design you've got can deliver the 42,500 tonnes? Or are you still uncertain you need time and there is a risk that this -- the plant footprint will need to change to achieve your ultimate goal of 42,500? I'm just trying to understand if you're comfortable yet or you still need more time and, therefore, there's risk of CapEx.

And then secondly, just on pricing. You've spoken a bit about mix. I'm just wondering, I mean, with other input prices still spiraling lower, like spodumene, et cetera, I'm just wondering, I mean, in your discussions, do you think we're finding a floor yet? Or do you think we're still trying to find that with what's happening in the market?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [39]

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Well, thank you, Glyn. To answer your 2 questions. Number one, yes, we need more time. And as I said before, we will actually know the nameplate capacity of Stage 2 once we're ramping up, so will take us some time to know whether this -- the total nameplate capacity of both stages put together is 42,500 tonnes. Or when it's more or whether it's less, what's the capacity?

When you run purified product, it's different than when you run primary product today because the recovery rates are different in the plant. But the plant can process one flow rate to it. So putting all those things together will tell you about the production capacities.

What we are doing this year is we are not focusing greatly on increasing production during this year because the market is pretty tight. Our main focus is towards quality that should result in improved prices for our contracts. And improved purified production should improve the pricing, and that will move us through to your second question. And at the same time, we're looking into reducing the cost because we think this is a year to protect margin.

Margin is a cornerstone of our strategy, and it is the most important competitive advantage that we have, and we have not only to keep it but to improve it over time. So that's the objective for this year.

When we talk about pricing, it's very difficult to tell you whether it will reach a floor or not. I think that the market said that -- this before, it's operating on a cash basis. And people that are making cash returns on a monthly basis, they continue to produce. And as they continue to produce, we have to see at which is the level at which some of the spodumene producers will have to shut down operations. So far, what we have been seeing is delays in the shipments that are telling us that something is starting to change in the market. But I can't tell you that will reach a floor.

And I'm using my own experience. I come from the oil industry, and I saw a movement like this about 2 years ago. The strategy that I put place at that point in time was making sure that we kept the profit up and running because the only thing that will get you through a crisis like this is if you're a profitable business and you can continue to invest, which is our case. We are fully funded to complete Stage 2. So by the time the market returns, we not only have increased capacity but we also have the quality and the low cost to take advantage on that profit.

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Operator [40]

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Your next phone question comes from Chris Chill (sic) [Chris Cahill] with Quest.

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Chris Cahill, Quest Asset Partners Pty Ltd. - Founding Partner [41]

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Just on you mentioned a major maintenance program, March quarter. Could you just tell us a bit more about scope and duration of that, please?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [42]

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Well, basically, we are doing the maintenance of the 2 main reactors. That is something that we are doing to improve the quality of the product that we are producing. We're taking one of the reactors out of production during the month of August, and the second one will be taken out of production during the month of February. We picked those 2 months because they are -- historically have been the lowest of operation months so that their financial impact is as low as possible.

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Chris Cahill, Quest Asset Partners Pty Ltd. - Founding Partner [43]

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Okay. And you talked about the 5% target. And I appreciate your comment on quality, but you also talked a lot about the costs. Can you give us any sort of forecast on, with the 5% increase in volume, how you see the margin moving?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [44]

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Well, we -- the margin will depend a lot on the price. Unfortunately, I mean it's difficult to tell you something on the price. So what we are trying to do is to -- having that -- have that margin increase and quality improvement in the product as well as increase in the share of the purified product with the same cost as we had last year for a lower month of production and lower share of purified. So that's the objective. And the objective is to continue to improve the cost.

Because as I said before, the only thing that keeps you up and running even in tough market conditions is to protect your profit, which is what we are doing. We want to continue to be a low-cost, high-margin operator, and that's the name of our business.

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Operator [45]

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(Operator Instructions) Your first webcast question is: On the demand side, is the price/performance ratio of lead batteries improving significantly?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [46]

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I think that's -- I'll pass it on to Tara. She's better prepared than I to answer that.

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Tara Berrie, Orocobre Limited - Commercial Executive [47]

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I suppose when we're talking about performance, the key -- I guess the key parameters that the market looks at is energy density and range. And certainly, the market is -- battery manufacturers and car manufacturers are getting greater energy density and range out of their battery.

The thing that is confusing the market, I suppose, is -- or concerning the market is the pace. With regards to, I guess, the ratio of cost to performance, it's certainly improving. The biggest driver of the reduction in cost is the raw materials, and we've seen, obviously, there's been a reduction in the prices, lithium chemicals, in cobalt and in nickel. So that's certainly resulting in a significant decrease in the cost for lithium-ion batteries.

And in terms of performance, even though it's been a slow shift to the later or the, I guess, the more advanced nickel-based cathodes, it's certainly moving towards the higher-nickel content cathodes, particularly outside of China. But with the relaxation of the restrictions around foreign companies participating in the Chinese market, we'll see that some of the capabilities of ex-China battery manufacturers and EV manufacturers will start to infiltrate the Chinese market.

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David Hall, Orocobre Limited - Business Development Manager [48]

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It's probably worthwhile just to add as well that there has been quite significant investment from some of the major battery producers in existing cathode formats with some very, very good gains in efficiencies. So when you look at the 6:2:2 cathode formats and 5:2:3, there have been some great leaps forward in terms of the efficiencies of those cathodes. And there's been investment on the anode side as well that has delivered vast improvements in battery efficiencies.

So there's also gains in the battery chemistry as well. So there's a lot of focus on it in the industry, and it's rapidly heading in the right direction.

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Operator [49]

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There are no further questions at this time. I'll now hand back to Mr. Perez de Solay for closing remarks.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [50]

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Thank you, Lexi, and thank you, everybody, for participating in this call. Look forward to continue discussing with you whatever you need. Thank you.