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Edited Transcript of ORE.AX earnings conference call or presentation 22-Oct-19 12:01am GMT

Q1 2020 Orocobre Ltd Earnings Call

MILTON, QLD Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Orocobre Ltd earnings conference call or presentation Tuesday, October 22, 2019 at 12:01:00am 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

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Conference Call Participants

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* Bria Murphy

BMO Capital Markets Equity Research - Associate

* Chris Brown

Morgans Financial Limited, Research Division - Senior Analyst

* Levi Spry

JP Morgan Chase & Co, Research Division - Research Analyst

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* Reg Spencer

Canaccord Genuity Corp., Research Division - Mining 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 Limited September 2019 Quarterly Market Update. (Operator Instructions)

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

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

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Thanks, Evie. I would like to welcome you to Orocobre's activity briefing for our September 2019 quarter.

We continue working to develop and foster the company's safety culture and performance. Various initiatives continued throughout the quarter, including the elimination of plant-based risk factors and the provision of additional support for middle management to master the hazard and risk identification process. The reporting of incidents and observations is now migrating to Intelex, a cloud-based environmental, health, safety and quality management system.

An incident occurred at Olaroz in August resulting in an LTI. Since then Olaroz has achieved 47 days without an LTI. Borax Tincalayu mine achieved 74 days without an LTI after an incident in July, and the Sijes mine has achieved 229 days without an LTI by the end of the quarter. Campo Quijano has achieved 182 days without an LTI.

Moving on to the results for the September quarter. The Olaroz lithium facility achieved the highest-ever production recorded in a September quarter at 3,093 tonnes. This was achieved despite scheduled maintenance activity during August which saw a full planned shutdown for 5 days. Additionally, one of the 2 reactor units remained offline for planned maintenance over the remainder of the month. The maintenance shutdown at Olaroz during August was successfully completed at the budget without any LTI for environmental incidence.

Quarterly sales revenue was $22.1 million, down 21% quarter-on-quarter with a realized average price achieved of $7,111 per tonne on a free-on-board basis. Our September quarter product pricing was below that of the June quarter due to current market softness. Sales volume for the quarter was down 8% quarter-on-quarter to 3,108 tonnes.

Gross margins, excluding the Argentine export tax were $2,226 per tonne. This represents 31% of revenue but it's down 40% quarter on quarter mainly due to the lower average price received.

Cash costs for the quarter were $4,885 per tonne which is up 5% on the prior corresponding quarter.

Moving on to the lithium growth projects. During the quarter, Orocobre, Toyota Tsusho and Toyotsu Lithium Corporation representatives hosted a groundbreaking ceremony for the commencement of construction at the Naraha Lithium Hydroxide Plant. The Naraha plant is designed to convert industrial-grade lithium carbonate into battery-grade lithium hydroxide. Feedstock for the 10,000 tonne per annum Naraha plant will be sold from the Olaroz lithium facility Stage 2 expansion that will produce industrial-grade lithium carbonate.

Activities to-date include safety management planning and training as well as commencement of procurement for key components. As at 30 September, approximately $35 million has been spent on the first phase of engineering and civil works at the Naraha plant. Construction of key items for the Stage 2 expansion of the Olaroz lithium facility, such as new roads, evaporation ponds, a secondary liming plant and new production wells have continued to advance. As of 30 September, approximately $62 million has been spent on the first phase of the Stage 2 expansion activities.

Moving on to the lithium market. Short-term demand remains subdued due do the same set of factors as the previous quarter, including slower Chinese EV market growth, cathode/battery performance challenges, the U.S.-China trade war and lower energy storage system demand. However, long-term fundamentals remain intact.

The European Union reiterated their focus on the reduction of CO2 emissions which will result in more stringent penalties implemented in 2021 with a phase in period commencing in 2020. Capacity commitments of battery manufacturers continued to grow with 2,026 gigawatts per hour of capacity planned for 2028 compared with 292 gigawatt hour currently.

Furthermore, several partnerships were announced, including Toyota and CATL, Northvolt and VW and LG Chem and Tesla. We'll continue to build relationships with our customers for long-term supply and expect the establishment of long-term strategic relationships will ultimately deliver improved product pricing.

Moving on, Borax Argentina continues to demonstrate improvement in sales performance with new supply agreements being signed with world-class players in the fertilizer and industrial sectors.

Unit costs continued to be controlled at or near record lows. The September quarter saw Borax deliver another solid performance with 12,480 tonnes sold.

During the quarter, Orocobre welcomed Mr. Hersen Porta into the role of Chief Operating Officer. Hersen has significant experience in process engineering, process control and quality performance. He has additionally been involved with the commissioning of several new chemical plants which will be invaluable as the Stage 2 expansion is completed.

At the end of the quarter, Orocobre corporate had available cash of $223.5 million after expenditures mainly related to Olaroz expansion activities, corporate costs and Cauchari JV expenditure. Net group cash at 30 September 2019 was $151.2 million after including Sales de Jujuy and Borax cash and project debt.

Overall, this has been another solid quarter for Orocobre with a strong operational result, with record September quarter production, good progress on the Olaroz Stage 2 expansion and construction of the Naraha Lithium Hydroxide Plant commencing.

I will now hand back to the operator for questions. Thanks, Evie.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today comes from Joel Jackson with BMO Capital Markets.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [2]

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This is Bria Murphy on for Joel Jackson. Can you tell us what the production mix was between primary and purified products in the September quarter? And if you can, can you give an indication of where you expect this trend -- or this to trend in the December quarter and if possible for the full year?

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

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Thank you, Joel (sic) [Bria]. Most production for the quarter, I would say, totally was primary product given the concentration of brine we had in the ponds and we expect them to increase production of purified product in the following quarter.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [4]

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Okay, thanks. And then, I guess, just related to that, can you provide an indication of the current pricing delta between primary product and purified products?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [5]

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Well, David can answer that better than I. It still remains in the $2,000 to $2,500 range. David, you can confirm that?

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

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Yes. So I agree, Martin. It's still in that sort of range in terms of the delta.

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Operator [7]

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Your next question comes from Reg Spencer with Canaccord Genuity.

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

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Just a couple of quick questions from me. Firstly, around the lithium hydroxide project at Naraha. I see that there has been a capital cost increase there. I was wondering if you could outline where those CapEx increases have come from.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [9]

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Think you, Reg, for your question. Largest increase is coming from the inclusion of kiln oven to be able to reutilize the lime from the process. This will impact the project team in cost reduction that we've announced before, I think, we said that in one of the earlier calls that this kiln project -- this kiln oven was going to enable us to reach lower production costs since access to lime and disposal of used lime in Japan is very expensive.

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

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Okay, understood. Just around the market and pricing. I'm sorry, I missed the previous -- your previous answer to the previous question around your guidance or outlook for primary versus purified product split going forward. Previously, you guys had suggested that the December quarter is typically when you have better climate conditions to be able to produce some battery grade. So are you expecting that number to go up in the coming quarter?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [11]

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Yes, we will produce more primary -- more purified product during the December quarter as you said because brine conditions are better. However, regarding sales, David can comment to you about our sales forecast of purified product for the quarter.

The previous answer was around the price differential between primary and purified which continues to be between $2,000 to $2,500. Now David, if you want to explain some more on the expected sales of primary and purified for the following quarter.

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David Hall, Orocobre Limited - Business Development Manager [12]

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Sure. Reg, in terms of sales for the December quarter, we're probably going to see it at similar profile to what we have in September but then expect that to be improving in terms of the mix between purified and prime by the end of the new calendar year.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [13]

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Okay, great. Just a quick question around previous comments on the delta between technical grade and purified product. Look, we can debate how accurate the various price reporting agencies are in terms of their reported prices. I've got a set of prices here in front of me which suggest a much larger differential between a technical-grade product into China versus a battery grade.

In terms of your customer mix, are you spending more time looking at the Japanese and Korean markets, which seem to be getting a better number especially for your battery grade? I'm just trying to think about how you guys alter your marketing plan to offset what does look like a weak pricing environment and from the data that we can all see, it doesn't look like that's going to turn around in the short term?

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David Hall, Orocobre Limited - Business Development Manager [14]

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Yes. Look, Reg, to answer your question in terms of the customer mix, as we've said in the past and as we've, I think, largely demonstrated until recent times is that we're looking for a fairly even spread geographically. So certainly looking for a good presence in Korea, obviously, Japan but also China as well.

The thing with China is that it makes up such a large part of the market and also parts of quite strategic supply chains into the battery sector. So having a presence there is almost a requirement. But yes, just to summarize, we're looking for a fairly even spread geographically, particularly in relation to the battery market footprint that we have.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [15]

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Great. And then just one last question. Do you think that some customers are holding back purchases in order to try to get the best price given current imbalances in the market? How responsive have your customers been in terms of contract negotiations for the next 12 months, say? Are they being a little bit more stand-off-ish versus previous years where the market has been tighter?

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David Hall, Orocobre Limited - Business Development Manager [16]

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There's a bit of a mixed bag, Reg. Some customers have come through a situation or are still experiencing the tail end of a situation where they were sitting on quite an amount of inventory. So there is some hesitation there from that group of customers in terms of committing for the future and perhaps operating their business the way that they have done in the past. So they're taking a bit more of a wait-and-see and shorter-term view on how they run their business, I think, until they get clarity on exactly what is happening in the market.

At the other end, with the larger corporate-style customer accounts, we're seeing very different behavior, where there are -- there's new business from new battery platforms that is coming online. So the discussions in regard to longer-term commercial agreements there are still progressing, and we're in the final stages of a number of those being closed right now. So there's a longer-term view in that customer segment.

So yes, look, a bit of a mixed bag, I suppose, to summarize, that the larger customers are taking a much more longer-term view here than those at the smaller end of the volume scale.

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Operator [17]

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(Operator Instructions) Your next question comes from Rahul Anand, Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [18]

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I might start with a focus on costs. If you look at the cost numbers, look significantly higher if we compare to sort of the past period. And then, also if we focus on the fact that we've only produced primary product this period despite having a good production result. I just wanted to understand some of the key drivers there. I understand maintenance, et cetera, but how should I think about these going forward? That's the first one.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [19]

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Rahul, it's Neil speaking. Rahul, so firstly, I mean the statement I'll make upfront is you've got to look at production versus cost of goods sold. Obviously, there's a lag with production and cost of goods sold. So that's just upfront statement I will make because you're talking about the quarter with just primary, but in terms of the sales included in there, there is some purified and micronised products.

So the first point I'd make is the lower tonnes that have been sold. So if you look at that, that's about 8% lower. 3,387 was the June quarter versus 3,108 in the September quarter. We then also -- as I'm stating upfront with the production versus cost of sold, we have a higher value of carryforward inventory from June. June itself was a higher -- if you just look at the month of June versus the quarter of June, it was a higher cost month. The peso also appreciated during June by about 5%. So that contributed to it as well. We also do receive a refund on the Puna -- the Puna refund, which given the lower average price that we're selling at would reduce as well. So that benefit we get has reduced. So when you throw that all in together, it more than accounts for the increasing cost of -- it's gone from $4,493 up to $4,885.

The other point I will make is we all know there was a devaluation in the middle of the quarter, but again that will be sitting -- a lot of it will be sitting in the 30 September inventory carried forward into the next quarter. So there was a small benefit that came out of that, but as I said it's got to do with inventory and when it's produced and when it's sold.

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

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Rahul, if I may add to Neil's comment. I think that on top of the fact that you will see prices coming down in the future because of increased production, you also have to consider what we discussed before that the operational changes that we are making are costing us some money in the short term. But we expect to -- better profit in the long run as we're being able to reduce the costs. We're working a lot on cost of reagents and improvement in the plant to improve the quality of the product we're producing so that is reflected.

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

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Okay, understood. So just to reconfirm, Neil, really quickly, is -- so the month of June basically had costs higher than about $5,000 per tonne, is that right?

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [22]

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I'm not going to give you an exact number on -- we report quarterly, Rahul. So I'm not going to get into the detail of what monthly -- what monthly costs were, but they were higher. And they're -- as I mentioned, there was a peso appreciation of about 5%, so that contributed to that.

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

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No, that's fine. I can take a quick one offline after that. I'll move on to the next one. In terms of, I guess, the mix of sales at this point in time where we stand in terms of the book. What's the rough proportion of spot sales and contract sales? And how do you see this evolving going forward? That's the first part of the question.

Second part is, with Stage 2, can you remind me of the time lines? And then also are you seeing or do you expect more contract sales out of Stage 2 because you'll have your existing customers and product quality well understood in the market having produced for quite a while now since calendar year '16 or '15?

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David Hall, Orocobre Limited - Business Development Manager [24]

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Rahul, it's David. Just on the contract split question, as we sit right now we have approximately 30% of business contracted. But keep in mind that we're in the annual negotiation season here, so we're looking to close quite a number of deals over the next 4 to 6 weeks and the market does typically run on a calendar year annual cycle.

On your second question for Stage 2, obviously, a chunk of that will be going across to Naraha, approximately 10,000 tonnes out of the 25,000 tonnes. And we will be looking to contract the lion's share of the balance as well.

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Operator [25]

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Your next question comes from Levi Spry with JPMorgan.

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Levi Spry, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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Just rounding off the CapEx question. So can you just remind me, so the lithium hydroxide, the CapEx there has increased from $78 million to $90 million on the basis of a change in scope with a new kiln, is that correct?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [27]

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Yes, it is.

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Levi Spry, JP Morgan Chase & Co, Research Division - Research Analyst [28]

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Yes. And so when do we get an update on the CapEx for Stage 2? I understand you're recounting the engineering numbers, what, next quarter?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [29]

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We are finalizing engineering numbers during the current quarter and we expect to give you an update of the numbers towards the end of this quarter. Again, as I said before, we are looking into every single number and every single supplier for the project and so far we haven't found major discrepancies from the budget we put together for the project.

The key contracts, being the supply of certain reactors and specific pieces of equipment for the plant is coming along during this quarter. So towards the end of the quarter, we should have a better estimation of the number and we'll let you know how it progresses.

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Levi Spry, JP Morgan Chase & Co, Research Division - Research Analyst [30]

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Okay. And just on the, I guess, the OpEx question. So when would you be in a position to give us firmer guidance on unit costs?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [31]

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We never gave guidance on unit costs in borates and many things. And you can imagine with a volatile economy like Argentina these days, estimating the FX rate and the impact of devaluation becomes difficult. As Neil was mentioning, we've had a very high inflation in the months of July and August followed by a significant devaluation in September.

So during the past quarter, we saw the whole impact of inflation being higher than devaluation. During this quarter, we will benefit from a larger devaluation than inflation, and we'll have to see how the economic levels in the local market continue to perform. Remember that roughly 45% to 50% of our cost base is denominated in pesos, so that creates a significant volatility for us to be able to give you a firm guidance on cost projections.

I don't know, Neil, if you want to comment something else on that.

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Neil Kaplan, Orocobre Limited - CFO & Joint Company Secretary [32]

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No, no, I think that's spot on Martin. I think in terms of guidance, we've never given guidance on costs and that is due to the volatility. It's been due over the past years to stabilizing the operation, Levy, it's -- until we get to absolutely steady-state of what we're doing, there's no point throwing numbers out there. So -- plus the reasons that Martin added on -- related to inflation and devaluation.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [33]

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The other important thing to mention is that we are currently working on reducing the physical units of consumption. Basically, we're focusing on consumption of reagents, stabilizing the plant and running it at a lower all-in cost, which is objective in critical units, and that will translate into lower and lower cost over time, which is objective.

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Operator [34]

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Your next question comes from Chris Brown with Morgans.

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Chris Brown, Morgans Financial Limited, Research Division - Senior Analyst [35]

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Thanks very much for the presentation. I think Rahul's undercut me a little bit in terms of questions on costs. But I would like to ask you, David just mentioned steady-state production. When do you now expect steady-state production to come to fruition for you? And just looking back at the costs, I see September quarter has been the high quarter for the last, well, 3 years, really, since September '16 in terms of cash cost, and it has come down from that. The September '17 quarter was $4,986. It came down to $3,900 after that. September '18 was $4,600, it came down to $3,900 after that.

Are you expecting that sort of decline as these seasonal influences pull out? And as I said, can you talk about steady-state production, bearing in mind that there will always be some seasonality in the production?

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

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Thank you, Chris, for joining and for your questions. When we talk about steady-state, we're trying to get to steady brine concentration at the inflow of the plant. That's the objective. And we're getting closer to be there, and that's why you saw better production in the September quarter as compared to previous September quarters because we've been able to stabilize the brine quality. We're looking forward to continue to operate the plant in this situation, and we're trying to find the sweet spot of the plant.

That's to say that I do not expect such -- when you referred to the comparison of December quarter to September quarters in the previous years was mostly because of difference in the brine concentration that enable a much larger production in December. We're targeting better production and more stable production in the quarter of December, but I wouldn't expect such a large increase in production as you saw in the previous years because we'd be basically enjoying a better brine concentration as a consequence of all the measures that we've been taking in the pond management system and in the plant operation in the last 6 to 9 months.

So that's -- we're approaching steady-state of production if -- with that, we'll refer to brine concentration at the input of the plant.

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Operator [37]

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(Operator Instructions) We do have a question on the webcast from [Ronald Lomax.] He asks, can you please give an update on the political situation in Argentina and Chile as it affects the company?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [38]

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Thank you for the question. It's not an easy one. Briefly on Chile, there's a large social turmoil in Chile. Our base in Buenos Aires have been talking to colleagues in Chile in the last few days. Significant social unrest, and the markets did not perform well today in Chile. Mostly related with long-term social unrest in the country which yet we expect to clear in the next few days. The government is taking all necessary actions to face the social unrest and return calmness to the country and to the markets, and we expect the government to be effective in that regard.

There were some announcements made on the papers today about potential strikes in some mining operations mostly in central Chile. That's, again, what we -- what I read today from the papers and what I discussed briefly this afternoon with some colleagues across the Andes in Santiago.

The situation in Argentina is different. It's -- we're in the middle of general elections. This Sunday will be the first round of general elections for Presidency in Argentina. There are 2 candidates. One is the current government led by President Macri. The other one is Alberto Fernandez jointly with Cristina Kirchner as candidates for Vice President from the Peronist party.

In the primary elections, the Fernandez and Kirchner formula obtained majority. They got almost 49% of the votes. And should they perform the same way in the first round of elections this Sunday, they would become the elected President and Vice President of Argentina. However, nothing is set until the actual elections are performed. And if the difference between both candidates is less than 10%, it is likely that it will be a ballotage in around November 15 for presidency in Argentina.

In terms of financial markets, as we discussed, exchange controls are in place in Argentina and restrictions for local companies to access dollars for transferring dividends are applicable. There are no restrictions to accessing dollars for paying imports, and companies are required to bring in the dollars coming from exports into the country. In our case, that's not a serious issue since we are investing all the excess cash flow. All the dollars that are brought in are used to pay the imports required for Stage 2 financing or the operational cost of Stage 1.

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Operator [39]

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Your next question comes from Reg Spencer, which is a follow-up question, and he's from Canaccord Genuity.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [40]

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Just a follow-up question. Do we need to change the way we think about Stage 2 production costs given that you'll move to continuous self-harvesting? Is that going to have a material impact on operating costs going forward?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [41]

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What we expect, Reg, from Stage 2 is that the larger amount of production and the improvements that we're making in the process will help us drive the costs further down, particularly in primary products.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [42]

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Okay, so that's not going to have a material...

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [43]

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It won't have an impact on the harvesting process. We just completed our harvesting process for all the ponds over a 3-year cycle, and we will restart it next year, and will start to be continuous part of our OpEx over time.

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Operator [44]

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

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [45]

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Thank you very much for joining the September quarter results call, and we hope to continue having you on board and informing you on the performance of the company during the next quarters.

We're very happy with the production results of the quarter. The market continues to be the way it is, and we are highly focused in reducing costs and improving our performance over time. Thank you.