Orocobre Ltd (OTCPK:OROCF) Q2 2020 Earnings Conference Call February 20, 2020 6:30 PM ET
Martin Perez de Solay – MD, CEO & Director
Neil Kaplan – CFO & Joint Company Secretary
Tara Berrie – Commercial Executive
David Hall – Marketing Director
Conference Call Participants
Rahul Anand – Morgan Stanley
Nick Herbert – Crédit Suisse
Levi Spry – JPMorgan Chase & Co.
Warren Edney – Baillieu
Reg Spencer – Canaccord Genuity
Harsh Bardia – Citigroup
Adam Baker – Global Mining Research
Joel Jackson – BMO Capital Markets
And welcome to Orocobre Limited 2020 Half Year Results, Market Update Conference Call. [Operator Instructions].
I would now like to hand the conference over to Mr. Martn Prez de Solay. Please go ahead.
Martin Perez de Solay
Thank you, Jessie. I would like to welcome you all to Orocobre’s 2020 half year financial results presentation. Let me begin with a brief summary of the results before Mr. Neil Kaplan takes us through the half year financials in greater detail.
By now, I’m sure that you are all aware that over the past 12 months, the lithium market have been challenging for producers. Despite the soft market conditions persisting, Orocobre has again delivered positive operational results, although the Orocobre Group posted a consolidated net loss after tax of $18.9 million. Despite this, the cash position of the company continues to be strong with $212.2 million of cash on our balance sheet, which yields a $115.5 million net cash position. Safety, along with productivity and quality remains our key focus. We believe safety is a foundation to improve performance.
Throughout the half year, 3 LTIs were recorded at Olaroz with all started returning to work on full duties. Recognizing the ongoing soft market conditions, our operational focus has been on process stability and product quality. This has enabled further development of the pond system and brine inventory, improving our operational resilience through seasonal weather variations. The combined results of these efforts culminated in a new record of 6,679 tonnes of lithium carbonate being produced during the half, which was up 10% from previous corresponding period. We are seeing higher processing capability and improved quality and consistency of both our industrial and battery-grade products, and we are steadily working towards increasing the production of purified product being produced.
Sales revenue for the half was $39.4 million from sales of 6,395 tonnes, which was achieved with an average price received of $6,157 per tonne. This resulted in gross cash margin of $1,514 per tonne for the half. Importantly, operating margins have been maintained at 25%, resulting in a positive operating profit of $6.1 million.
We remain confident that our full year operation will be at least 5% higher than financial year ’19, and the expected product prices for the March quarter to be approximately $5,000 per tonne. Following the end of the December quarter, Orocobre finalized 2 long-term supply contracts, which will see 2 top-tier Chinese cathode manufacturers supply the combined total of 10,080 tonnes of battery-grade
Lithium carbonate over the next 3 years. And finally, sales of Borax for the half year were $9.6 million. We generated an operational EBITDAIX loss of $0.2 million after conditions in the Brazilian market softened. I will now pass to Orocobre’s Chief Financial Officer, Mr. Neil Kaplan, to run through the financial results in more detail.
Thanks, Martin, and a good morning to all. First up is the consolidated P&L. While tonnes sold increased approximately 24%, pricing has been the main contributor to lower revenues with an average price of $6,157 a tonne being received versus $12,295 a tonne for the prior corresponding period.
Revenue includes an adjustment to sales price due to a customer reallocation of product. Olaroz cash — cost of sales of $4,643 a tonne is higher than the same period in FY ’19 of $4,251 a tonne, excluding royalties, export duties and head office costs, mainly due to the reduction in the export incentive due to lower sales and a warranty provision related to packaging costs.
A bridge of Olaroz’s EBITDAIX from first half FY ’19 to first half FY ’20 can be seen in an upcoming slide. In spite of the soft market conditions, gross margin remained positive at $1,514 a tonne or a 25% cash margin. EBITDAIX includes approximately $2.6 million related to export duties and restructuring costs of $600,000, however, excludes a $1 million supply cost, which is treated as a lease in terms of AASB 16.
Depreciation cost of $1,215 a tonne versus FY ’19, $974 a tonne, include the amortization of the uplift in value resulting from consolidating Olaroz and the adoption of AASB 16 related to leases. An appendix in this presentation details the effect of AASB 16 on the balance sheet and profit and loss. Foreign exchange losses mainly relate to VAT and other balance sheet items, which are peso denominated.
The share of losses of associates relates to AAL $0.4 million. And the Naraha lithium hydroxide plant, $0.2 million. The income tax benefit is mainly due to the loss for the period, which resulted in an increase to the carryforward tax losses. This resulted in a statutory loss on 100% basis after tax of $18.9 million.
Moving on to the next slide. This slide details the underlying profit. In moving from the statutory loss of $18.9 million on 100% basis to an underlying loss after tax of $9.9 million, we have made the necessary adjustments as detailed on the slide. The underlying loss of $9.9 million for first half FY ’20 is mainly due to lower average lithium prices received, slightly higher costs, higher depreciation and higher finance costs in Olaroz as well as reduced interest income in our recovery.
Moving to the next slide. This slide details the bridge between Olaroz’s EBITDAIX for first half FY ’19 of $56.6 million and the first half of FY ’20 EBITDAIX of $6.1 million. The main components of the reduction are related to lithium pricing of $31.7 million and costs related to increased volumes sold of $4.3 million, offset our sales revenues related to volume of $7.6 million. Whilst the effect of such items are substantial, Olaroz has reported a positive EBITDAIX of $6.1 million.
Moving to the next slide. This slide details what the consolidated balance sheet looks like at December 31, 2019, versus 30 June, 2019. The column on the right is what the consolidated balance sheet at June 30, 2019 look like after the fair value uplift due to consolidation in the last financial year. The key points on the balance sheet are: cash has reduced, given the funding of Stage 2 expansion. And consequently, property, plant and equipment has increased mainly as a result of the Stage 2 expansion. The investment in associates has decreased mainly to the impairment of AAL of $4.1 million. Current external borrowings reduced as a result of the repayment of a portion of the Olaroz working capital facilities due to a change in Argentina regulation, whilst the noncurrent external borrowings increased due to shareholders’ loans from TTC, largely offset a repayment to Mizuho for the Stage 1 project finance loan.
The principal on the Stage 1 project finance loan has reduced from $191.9 million to approximately $99 million at December 31, 2019. And in 3 weeks’ time, we will have reduced to approximately $88 million.
A reduction of the deferred tax liability is mainly due to the loss for the period, which resulted in an increase to the carried forward tax losses. The finance lease liability increase of $25.8 million is due to the effect of AASB 16 related to leases.
Moving to the next slide. Cash generated from operations resulted in a negative balance of $2.1 million. However, from an operational perspective, this was positive taking into account corporate outflows of approximately $4.4 million and interest charges of approximately $5.9 million. In detailing some of the main movements, the purchase of property, plant and equipment related to sustaining and expansion CapEx, investment in associates represents our participation in an AAL private placement. Repayment of borrowings is the reduction of the principal for the Stage 1 project finance loan and repayment of U.S. dollar working capital facilities and the proceeds of borrowings relates to TTC shareholders’ loans to Olaroz and a drawdown of peso working capital facilities.
So in summary, despite a soft lithium market, Olaroz continues to be operationally profitable and we continue to pay down debt with over $100 million that would have been repaid by March 2020. Thank you, and I will now pass you back to Martin.
Martin Perez de Solay
Thank you, Neil. Let’s move on to the operational reviews. The management and improvement of Olaroz Stage 1 performance remain focused on safety, quality and productivity. The implementation of Intelex of our central safety management database has progressed well throughout the half. Our central safety committees have continued to make good progress developing an improved operating discipline at Olaroz. The implementation of specialized operator training and more frequent risk assessment has already produced greater consistency in Olaroz product quality and production process.
With Olaroz production process becoming more stable, our analysis have confirmed a sustained improvement of process capability CPK regarding the final products and analytical profile. In recognizing current market conditions, the operational focus for Olaroz has been process and product quality rather than maximizing production tonnage.
Towards the end of the half, a regimented financial plan was implemented, aimed at further reducing unit cash costs. This should maintain our current competitive position as one of the world’s lowest cost brine-based lithium carbonate producers. The Olaroz Stage 2 expansion will increase total expected lithium carbonate production capacity by 25,000 tonnes to approximately 42,500 tonnes per annum of design capacity, of which 10,000 tonnes will be used as feedstock for the Naraha Lithium Hydroxide Plant. Commissioning of Stage 2 expansion remains on track to commence in mid-2021. The Stage 2 expansion achieved a number of milestones during the half, including the construction, drilling and testing of new production wells. And so far, the newly completed wells are delivering flow rates and lithium concentrations that exceed the original expectations.
International engineering company, Worley, are now on site, undertaking supervisory works. And the detailed engineering of the new carbonate plants is expected to be completed in June half. Civil works for the new carbonation plants are expected to commence in June half with the structural steel currently on route to Olaroz after being shipped to Chile. Recent works on sites have included brine transport systems, rain diversion channels, decommissioning of the secondary liming plants, together with road, camp upgrades and 3 new evaporation ponds. And as of today’s date, vegetation clearing and construction of additional 16 evaporation ponds is underway.
During the half, a $180 million debt facility was finalized with Mizuho Bank to be used for the Stage 2 expansion of the Olaroz operation. Recently, conditions precedent have been finalized, allowing the drawdown of the first tranche of the facility. Importantly, the debt facility has a 10-year term with a low interest rate of less than 4% per annum.
Moving on to Naraha Lithium Hydroxide Plant. Since construction commenced, there have been no LTIs recorded. The Veolia Joint Venture is undertaking weekly safety meetings and regular site safety checks. The Veolia Water Technologies and TTC project staff continue to obtain safety training in alignment with the project safety management plans.
During the September quarter, I hosted a groundbreaking ceremony at the Naraha Plant construction site, together with TTC and Toyotsu
Lithium Corporation representatives. Since then construction activities have progressed very well with more than 40% of planned works now completed. Construction is expected to accelerate during the March quarter as more than 95% of purchase order for key components and equipment have been placed. Civil and architectural construction of several key plant components commenced during the December quarter, which included lithium carbonate and lithium hydroxide storage facilities, a laboratory, a wastewater treatment plants, the kiln structure, plant foundations, roads and liquid CO2 storage foundations.
Fabrication of the Naraha Plant process and utilities equipments will continue during the March quarter. As of December 31, approximately $39.3 million have been spent on the first phase of engineering works and procurement. At the end of the half, more than 40% of the project have been completed. Commissioning of the Naraha Plant remains on track to commence during the first half of calendar year 2021.
Two LTIs were recorded at the Tincalayu mine during the half, with all employees returning to work on full duties. Operations at Borax have continued to focus on minimizing the cost of production with unit costs continuing to be controlled. Current stock inventory levels remain well above minimum required levels. Sales were up 4.7% on the previous corresponding period for a total of 21,094 tonnes of combined products despite a drop in sales to the Brazilian market. Several new long-term agreements were signed during the half with world-class players in the fertilizer and industrial sectors. There’s a renewed focus in the Southern Cone of Chile, Argentina, Paraguay and Uruguay on Borax, also developing new product distributions throughout Asia.
As announced earlier this week, we have entered into a definitive agreement with Advantage Lithium to acquire 100% of their issued and outstanding shares that the company does not already hold. If approved, Orocobre stands to gain the 4.8 million tonnes of measured and indicated resources and 1.5 million tonnes of inferred resources currently defined at Cauchari. The integration of the Cauchari result with Olaroz will enable us to deliver optimal basin management with maximizing the long-term productive capacity of the Olaroz/Cauchari basins. Under the terms of the agreement, Advantage shareholders will receive 0.142 Orocobre shares for every Advantage share they held. This equates to Orocobre issuing approximately 15.1 million shares to Advantage shareholders. This transaction will allow us to continue cost-effective development of the Olaroz/Cauchari basins, and it does not trigger the need for additional financing for ongoing development of a project.
Once completed, the transaction will cement the company’s position as one of the world’s lowest cost lithium chemical producers to the great benefit of all of our shareholders and stakeholders. Moving on, I would like to hand over to Tara Berrie to discuss the lithium market.
Thank you, Martin. During the half, the lithium market remains challenged by unchanged demand fundamentals, including slower Chinese EV market growth, a sluggish Chinese economy, and the U.S.-China trade war. While there was no catalyst of sufficient magnitude to lift price, there were signs of improving demand conditions outside of China, most notably, within the European market.
Earlier in the year, the European Commission reinstated intentions to impose a €95 penalty for every gram of carbon emissions that a car manufacturer’s new car sales exceeded a 95 gram per kilometer limit. This is not the first time, however, a carbon emission target and penalty regime will be used in the European market to influence car manufacturer behavior.
In 2007, the European Commission announced a plan to penalize car manufacturers that exceeded a 130 gram per kilometer limit from 2012, scaling up the penalty from €20 to €95 by 2015. Car manufacturers met the 2012 target, reducing the average industry emissions from 160 grams to 130 grams per kilometer in just 4 years, and therefore, avoiding financial penalty. In lieu of new target, CO2 emissions remains stagnant between 2016 and 2018, as car manufacturers released models with only incremental changes. As a result, there was little incentive for traditional diesel and petrol-powered drivers to shift preference.
Moving on to the next slide. With the knowledge, existing EV models have largely reached saturation of the potential addressable market, car manufacturers have committed to aggressive product development. This slide outlines their plans to accelerate the release of new EV models from 2020 in Europe and the successive strategy has already had in the December quarter when Europe achieved record sales. Abandoning a strategy of largely targeting niches with incremental changes, car manufacturers now plan to target the masses, bringing together popular traits of flagship models, improved battery performance, and most importantly, a lower price tag that brings EVs in line with internal combustion equivalent and possibly lower after subsidies.
Currently, 12 of the EU countries offer incentives that reduce the purchase price, while most countries also provide tax reductions or exemptions for purchase and ownership. In 2019, the largest European car market, Germany, increased subsidies, particularly benefiting lower-priced EV. In Germany, consumer subsidies for electric vehicles that cost less than $45,500 increased by $2,500, to about $6,700.
The revised incentive structure has proven effective already. In December 2019, the total cumulative sales of EVs in Germany hit over 57,500, allowing Germany to surpass Norway as Europe’s biggest seller of electric cars. More recently, in January 2020, Germany’s sales were up 62% year-on-year. As the largest car market in Europe and one of the largest in the world, Germany’s increased appetite to EVs, provides a large potential demand catalyst for the battery chain.
Moving on to the next slide. Battery manufacturers have been quick to respond to Europe’s momentum with the flurry of battery plant investments announced late 2019 and continuing into 2020. Top-tier battery and car manufacturers have been drawn to Europe’s potential, providing greater certainty that the expansion will go ahead. With these announcements taking into consideration, Europe will become the second largest battery manufacturer in 10 years, second only to China. And with that, gain 10% share of a battery market that will grow by almost 5x.
Moving on to the next slide. On this slide, we look at the long-term supply and demand situation. With Europe gaining momentum in the near-term, and China inevitably recovering, it’s likely that marginal production currently under pressure will be required, particularly, given the impact that project delays will have on the future.
Moving on to the next slide. During 2019, a number of large-scale supply curtailments were made, having ongoing impact. Looking at the anticipated 2020 supply, as per announcements made in 2017 and 2018, almost half the expected supply volume has been removed. Less than 10% of the curtailment is due to moderated production from existing operations, meaning, over 90% of this supply eliminated in 2020 is accounted for by expansions or new projects that cannot be restarted or rent up as required by demand. Of the approximate 330,000 tonnes taken out of the market, almost 80% is accounted for by hard rock sources, illustrating the challenges of bringing on independent hard rock into an inefficient, higher-cost conversion market.
Moving on to the next slide. Previous research performed by the company into the conversion plant market revealed a significant difference between the capabilities of converters, and therefore, their operating utilization rate. While almost 3 years has passed since this initial research and the total lithium market has grown by approximately 50%, little improvement has been made in the performance of marginal converters. And as a result, lithium chemical supply growth from high-growth sources has largely come from Tier 1 converters. Capabilities remain concentrated and an inefficient conversion market poses a potential bottleneck as demand accelerates.
So in conclusion, on the basis of recent supply reductions, potential conversion plant bottlenecks and growing momentum in Europe, Orocobre believes there is potential for improved market conditions, mid- to late 2020. While the coronavirus may delay an improvement to market balance due to logistical challenges and operational closures throughout the battery supply chain, this is not expected to impact the size of Europe’s growth potential instead creating potential for pent-up demand. And now I will pass it on to Martin to conclude the presentation.
Martin Perez de Solay
Thank you, Tara. In summary, market conditions remain difficult, but our operations are making significant progress in terms of safety, quality and productivity. We see the current quarter pricing to remain soft, but subject to external interests such as the coronavirus. We see the demand fundamental. We have a positive impact on market conditions later in the year. Thank you, Jessie, and we will now take questions.
[Operator Instructions]. The first question comes from Rahul Anand with Morgan Stanley.
I’ve got a couple. I might start with the transaction, please. In terms of basin management that you were talking about, Martín, if you could help us understand a bit. I mean, is there any current issues with the brine quality being — that’s been coming out of the bores? Or is this purely just future management that we’re looking at here?
Martin Perez de Solay
Thank you, Rahul, for joining and for your question. Basically, there are no issues with the current brine quality. Indeed, the results of the wells that we are drilling for expansion are coming better than expected in terms of flow rates and brine — and lithium concentration in the brine. This is more a long-term basin management strategy that we clearly think it’s — this is not a basin for 3 projects in the long run. And we have — this will position us to better control future events that may pop up.
Okay, understood. Second question for you, Martín, is around the use of lime. I mean is there any possibility that the flow sheet can change at this point whereby you start applying lime in the process, perhaps after evaporation, like one of your peers has designed the flow sheet?
Martin Perez de Solay
For the time being, we are keeping the same flow sheet on Stage 1 and making certain improvements on Stage 2 to improve the product quality as to what our customers require. But we’re not thinking of any major change. Nonetheless, we’re very active in terms of research and development, continuing to look into new technologies that may help us drive the costs further down and continue to improve the product quality. Product quality has moved upward significantly during the last year in terms of lithium concentration in primary product and overall quality parameter for our products.
Yes. So I was sort of more focused on the cost side, I guess, there. Okay. One sort of financial question then. With the holding tax increase for the overseas dividends, how should we think about those Neil?
No, there’s no withholding tax increase. It’s deferred. You’re talking about the 7% to the 13%?
I’m talking about the last few slides in the presentation where the talk of the withholding tax changes.
Yes. The rate will go down and the withholding tax will go up.
Right. Okay. So for our purposes, basically no change?
The next question comes from Nick Herbert with Crédit Suisse.
Just a few from me, please. And just starting on Advantage Lithium. Understand it’s still a fair way off, but could you just talk to what you think about conceptual timing of that project development? And then also how you’re thinking about infrastructure and whether that will be utilizing Olaroz infrastructure? And then just some initial thoughts around what saving that could achieve in terms of CapEx relative to what the Advantage Lithium feasibility study put out?
Martin Perez de Solay
Well, number one — thank you, Nick, for your question. Number one is that we are not planning to do a development of a project in terms of building a plant in Advantage, but rather thinking of using that brine in future expansions at Olaroz, where we should take advantage of the synergies and having all the services already built and constructed. That will enable us to reach the development of that brine in the future at a much lower cost. At the same time, it also gives us the option to monetize that brine within existing facilities at a faster rate. So that’s the overall take out from the deal.
That makes sense. Are you able to sort of give some idea of what you’re initially — or the initial work has shown on potential CapEx savings versus that feasibility study of Advantage? Or it’s just too early?
Martin Perez de Solay
Well, I think it’s too early, and we are not planning to, as I told you, to build a new plant to develop those resources. It should be further expansions on existing Olaroz facilities that will enable us to develop and use that brine.
Got it. Understood. Okay. Second one, just the new liming plant that’s due to come on line. You talked to cost savings there. Can you just outline the magnitude of those cost savings, please?
Martin Perez de Solay
Neil, would you have some detail on liming issues? Most of the cost of — as an introduction, I can tell you that most of the savings have been around the soda ash and other reagents. The secondary liming plant is just starting operations as we speak, has already been completed. And its main objective is to line the brine that we’re starting to cook for the expansion project.
Okay. And then just finally, coronavirus impact. With your discussions with customers, what are you hearing around volumes and disruptions there? And at this point, do you have any expectation around your March sales volumes and whether that will be impacted?
Martin Perez de Solay
I will divert that one to David, that is with us in the call.
Nick, look, just to summarize, I suppose what we’re seeing, and it’s in line, I think, with a lot of the research that the banks have documented, there’s certainly an impact in China, which everybody acknowledges, with some businesses being closed or curtailed in terms of production. There’s also an effect on raw material costs and logistics. So in short, what we’re seeing is customers where we already have commercial agreements in place, they are bearing to the cautious side, I think you described it. They’re obviously still buying, but they’re watching the environment quite closely. Those that don’t yet have commercial agreements in place also being very cautious to the point of — they’re largely sitting on their hands, at this point in time, just to see how the situation plays out over the next couple of weeks.
The next question comes from Levi Spry with JPMorgan.
A few questions from me. Got off pretty lightly so far. So Advantage Lithium, just remind me, look — the strategy behind that other than just buying something in the bottom of the cycle. So you spun that out originally, right? So why buy it back now? How did you value it? Can you take me through the process there?
Martin Perez de Solay
Well, the project was initially spun out to get the focus it required in exploration while the Stage 1 was being developed at Olaroz, which requires two different focuses. The work performed by the Advantage team has been very good in terms of developing the resources and being able to measure them. And at the current situation, I understand the current market situation, we think it’s a good moment to increase our resources in the basin and increase our control over the basin as well. We — as I’ve said before, we don’t think that 3 projects in the basin would be an efficient management of resources there. And this project not only enables us to manage resources efficiently, it gives us a lot of optionality in the future to further increase production and also to be able to monetize the brine that has already been drilled in a faster way.
Yes. Okay. So how did you go about valuing it?
Martin Perez de Solay
And with regards to pricing, I think it is impacted by the current market situation. And we think it’s a very good price for Advantage shareholders at this point in time because they will benefit from the current production from Orocobre as they will benefit from increased lithium prices in the future, holding the stock of Orocobre.
Okay. So on to the price then. So $5,000 a tonne for this quarter, your expectations. You’ve talked about improvement later in the year. Have you given this cost guidance? Is there a potential that you would rationalize your own volumes if prices went below $5,000?
Martin Perez de Solay
So far, our strategy has been to further reduce our costs and maintain our sales level. To the lesser extent possible, we will continue to do that. We’re enjoying a good cash margin. Neil can talk on this in more detail, that enables us to cover all our costs, including financing. And that the name of the game for us is to be the lowest cost producer in the market rather than reducing production. Obviously, from an inventory management perspective, as we did towards the end of the last year, we made slightly reduced production, not to have a large amount of inventory. But our objective is more to reduce the cost than to cut production.
Yes. Okay. And just on Stage 2, so I think from your presentation, you said you’ve spent about 1/3 of the capital. Can you just give us an update on how that’s tracking versus your budget? And when you plan to draw the debt?
Martin Perez de Solay
Well, basically, the debt has already been draw down. We’ve started 2 weeks ago. Neil, is that right?
We started — yes, just about 10 days ago, we started.
Martin Perez de Solay
And with regards to the progress on the project, we are very well advanced with the construction of the pumps. We are slightly below time, budget in the liming of those pumps. But drilling the wells, we’re getting good flow rates from the wells. We’re getting good brine concentrations in the wells that we are drilling. The carbonation plant is the largest piece of engineering that is being completed — will be completed during the June quarter. And that will enable us to finalize construction biddings and final costs because all the other things are already in progress.
The next question comes from Warren Edney with Baillieu.
Sorry, I’m going to ask a bit Advantage of a theme as well. Because I just like to get some understanding of the time, why now, the timing of it? Given that the VWAP for the last, I guess, October, November, December, was a very low CAD 0.20 a share. And even over the last month, it was about CAD 0.35 and you’re effectively offering something like $0.44, $0.45, $0.46 a share in Orocobre shares. And the market still looks like it’s still going to be very weak. So I just wondered why doing it now and why are you paying what appears to be quite a significant premium.
Martin Perez de Solay
Your question raises a couple of points. Number one is about the premium significant. Yes, indeed, it is, but it is the average premium that is paid for this type of transactions in the Canadian market. It’s not above nor below the standard transaction for — a standard premium for this type of transaction that involve control premiums. In terms of the timing, it’s quite difficult to get the bottom — the exact bottom of a cycle or get the exact up point of the cycle when you’re selling or buying. We think it’s the right timing to do it. Because if you think the amount that we are paying per turn of Measured and Indicated Resource, it is quite a convenient price for us to do it, as you look at it compared to other transactions or other companies that are trading with proved Measured and Indicated Resources.
The next question comes from Reg Spencer with Canaccord Genuity.
Just read some market commentary recently that the Ganfeng had lifted prices ever so slightly, not so much driven by demand, but more around the pass-through of increased logistics costs in China given the recent impact of the coronavirus. Do you see the possibility of that happening amongst other producers and potentially giving you a little bit of an uplift on pricing? And is that a realistic scenario, whereby producers are passing through higher costs to their customers, the cathode manufacturers?
Martin Perez de Solay
Thank you, Reg, for your question. Yes, if I can ask Tara to answer you. She’s the expert in that area.
Thank you, Martín. Thanks for the question, Reg. I think it’s difficult to, as David said previously, it’s difficult to get a read on the impact of the coronavirus right now. And the impact is quite mixed between all the producers. So the Chinese producers are saying that they’re experiencing higher raw materials. I think the obvious one is sulfuric acid and lime. So I think they’re experiencing higher raw materials prices, which we’re kind of immune to. So in terms of passing that on weak price, that’s a wait and see to see whether that impacts us. Overnight, Albemarle and Livent have come out with their results, and they’re seeing a softer condition. So as Dave said, it’s a little bit of a wait and see for now. And in terms of the overall market balance, I think it hit the whole supply chain, right from raw materials, right down to EV manufacturers. So it’s a matter of getting a gauge on what part of the battery chain is starting up first. And then that will sort of determine inventory levels and price outcomes. Ultimately, I think it’s just deferring demand until the second half. We might see a really strong second half. And as I mentioned in the presentation, there’s barely signs of some very meaningful momentum in Europe.
Okay, that’s good. And just on that inventory…
Martin Perez de Solay
Reg, in general terms, to complete Tara’s question, I think that you might see some short-term adjustment due to cost increases, but this is a market where the price drives it and the price drives the demand and supply has to adjust to prices. And that’s the way we see it.
Okay, understood. Just on the impact of the coronavirus then, you talked about improving demand conditions in the second half. We all know that there are still some significant inventories throughout various parts of the supply chain. Obviously, a deferral of any increase in demand means a deferral of any working down of those inventories. So — but do you think that any delay in the inventory unwind could be offset by significant increases in demand out of Europe? Is that a fair comment?
Yes, Reg. I think that’s a fair summary of what I was saying. I mean outside of Europe, the — I’m sorry, outside of China, the demand is strong and any supply chain that can — that is — excludes China, can sort of — they can — their inventory can be worn down, I suppose.
So on that basis and guise, any change to your geographic mix of your customer base and your contracting over the next — or has that forced a bit of a rethink into the discussions you’ve been having over the last few months?
Reg, I think what we’ve indicated in the past is that, traditionally, we’ve had a fairly even spread in terms of geography within the business that changed to a greater exposure to China in recent times as the market tightened up. So we’re in the process now of working that back, if you like, back into a more balanced picture. So longer term, we still see ourselves having a position in China, but it will be sort of back around the 20% to 25% level.
Okay. That’s great. And just lastly, another question on Advantage Lithium, take a bit of a different angle this time. Are you guys able to provide to the market some kind of information on the well locations for the Ganfeng operations and where they’re situated relative to the Advantage resource? And if those wells are in a location which could potentially lead to some level of resource depletion on the Advantage properties, does that change how you might think about the development of those resources and bring them into a potential expansion at Olaroz sooner than you might otherwise have?
Martin Perez de Solay
A lot of that, Reg, depends on — we are looking into the positions of the wells. We’re looking into the distance between wells. We’re looking into the speed of the pressure wave within the Salar. We’re building our hydrogeological models. We’re trying — now this is still something that we’re trying to understand and progress. And that’s why we think that 2 operations in the same Salar are much better than 3 operations. It’s better to get into agreements and produce an efficient drawdown of the resource, which is the final objective. We’re now sitting on top of our properties. And should the deal be approved by Advantage shareholders, we will have to sit down and understand how the whole basin operates in terms of hydrogeology, how the fluids move and how the pressure waves work underneath the surface, an understanding of that. We can put forward a long-term, sustainable, efficient way to draw down the resources, which is the more strategic objective of this transaction.
Okay. And just one final question on this before I pass it on. Are there any other hurdles which might prevent or present as a challenge in terms of developing that Cauchari resource, noting that the Ganfeng property pretty much sit between Olaroz and those of Advantage? Would you require some kind of agreement or easement from Ganfeng in order to pump brine across their tenement holdings? Or how might conceptually that work? Or is it just too early to make a call?
Martin Perez de Solay
Well, I think it is too early, but if you look at the way the properties are, these properties are surrounding Ganfeng’s operations in Cauchari and further to the south between Ganfeng and Orocobre, of the Olaroz flat salt. Both [indiscernible] communicated. And with regards to future reason and rights, I don’t see any problem in Argentina. No, the law provides for easy arrangement of treatment and rights. I don’t foresee that as a problem should that be required, but I think it is too early. The first stage is to understand the hydrogeological model, how it works, how it operates and what’s the best possible way or the most efficient way of drawing down resources in the long term. And it’s always easy to be intervening between two parties and three parties.
Next question comes from Harsh Bardia with Citi.
One more question on the lithium market, maybe for Tara. Recently, there have been some comeback of LFP batteries. How do you think about mix evolving over medium-term? Basically, what I’m trying to understand is with the Naraha plant commissioning next year, is the market still translating into hydroxide directionally, and therefore, the price premium expectation of a carbonate?
Thanks for the question, Harsh. So LFP batteries, there’s always going to be a place for those. They’re used in power tools and in a lot of consumer electronics. So there will always be demand for that. What we’re seeing is, I suppose, to put it simplistically, divide between China and Europe at the moment. Presently, where China is favoring LFP because they’re getting good energy density from some improvements in those, which is equivalent to the nickel-based, sort of like mid-generation 523s and 622s. So as a result of those improvements in the LFP technology, there’s less incentive for them to move across until they can prove — until they can reduce those nickel-based cathodes that require hydroxide at a lower cost and also safely. So outside of that, though, we’re seeing that EVs that are being manufactured in Europe are favoring the nickel-based cathodes and that’s being reflected by hydroxide prices and hydroxide demand. So to answer your question, I think that there will always be a place for lithium carbonate. It will be largely in China because of LFP. The transition to nickel-based cathodes will likely still occur in China, but just at a — with a lag to the rest of the world, I think.
So just a related question, the Tesla’s recent move, which is, again, China-centric to get exposure to LFP batteries, do you think it’s limited to the regional dynamics and it’s not going to spread in European and the U.S. market? Or is it like more of a price-conscious decision?
I don’t think that at all, that it’s going to spread. We’re seeing that Chinese manufacturers or Chinese battery manufacturers are actually going in investing capacity in Europe alongside the European — alongside European and South Korean and Japanese battery manufacturers. And they have an aim of actually producing nickel-based cathodes. So it’s more about what the EV consumers want out of their cars. So in Europe, for example, they favor longer-range EVs and they require that for their transport behavior, I guess, or their driving behavior. Whereas in China, they don’t require the energy density and range requirements that European or the rest of world consumer is wanting. So that’s — it’s kind of a consumer preferences-driven decision from battery manufacturers and the whole battery chain as a result.
The next question comes from Adam Baker with Global Mining Research.
Just wondering, given that you still got about $190 million of CapEx to spend on Stage 2 Olaroz expansion, just wondering if you’ve considered pushing back and delaying it given the current lithium price environment and the squeeze on margins.
Martin Perez de Solay
The answer is that we continue with the program on expense and as we outlined. It is already a bit delayed. We’re now targeting to complete it in the — reaching mechanical completion in the first half of 2021 calendar year and initiating commission in the second and ramping up — initiating the ramp-up in production — having production in the second half of 2021, but not for market reasons. We more or less took a more cautious view during last year. The key and important part of the expansion is that it will enable us to further reduce the cost of the operations, as we will be able to dilute fixed costs among the larger base of production and sales. And that will significantly benefit our operations from a cost perspective. And as said before, the way we see this market is being the low-cost producer. If the final objective that we have here, we have to be able to have a cost and a quality that enable us to sell our product at any market price and make a profit, which is what has been the strategy. So based on that, we are continuing to go ahead with expansion.
The next question comes from Bria Murphy with BMO Capital Markets.
It’s actually Joel Jackson at BMO. I had a couple of questions. Just back a bit on some of the LFP discussion. So we’re seeing a shift back a bit to LFP or gradual rollout of some of the more nickel [indiscernible] cathodes. So that’s not good for hydroxide in China, but we’re seeing good probably hydroxide in Europe. So do you have any changed views on hydroxide versus carbonate growth trajectory over the midterm?
Martin Perez de Solay
I think that I will have [indiscernible].
Sorry. Joel. It’s Tara Berrie. In terms of the growth trajectory, no, I think it hasn’t changed our views in terms of the split of hydroxide to carbonate. We won’t allow our demand from the bottom up. So — oh, sorry. I guess, maybe more so from EV model backwards. So looking at work EV model — what EV models battery is it that they use and then model it back through to hydroxide and carbonate. So with the knowledge, I suppose we saw late last year — yes, late last year and, I guess, early throughout the whole year, we were aware of the fact that there was difficulty in switching to the nickel-based cathode in China. So it hasn’t really changed our opinions, the assumptions that we’ve made on that split. And as I mentioned, hydroxide demand in China will increase over time and will probably incrementally take share away, I suppose, from carbonate demand. But as I said, there will always be a place for carbonate, and that will be largely concentrated in China as a result of the consumer needs for EVs.
And then my second question would be, what can you do on cost in the next few quarters? Are there some low-hanging fruit left? Any improvements? What do you think are the opportunities there?
Martín, I’ll take this one up. Joel, it’s Neil. Well, we’ve got a bunch of different things going on, which, towards the end of last year, we started a plan to reduce costs. Obviously, firstly is reagents. So there’s a focus by the operational team on the consumption ratios to reduce those. And those consumption ratios are being worked on as we speak. It started at the back end of last year and continues and will continue into the future. Even reagents is a substantial portion of our cost base as well as renegotiation of key reagent contracts. Flowing on from that, we have logistics where, again, we’re renegotiating with contracts with suppliers and also trying to be more efficient with the logistics. So in other words, if we’re bringing soda ash into the country, we would come in with soda ash and then the truck would go back with lithium carbonate back to the port. So looking at efficiencies like that as well as — we’re looking at every area. We’re looking at maintenance tenders. We’re reviewing man-hours. We’re looking at the camp accommodation, food, cleaning, et cetera. So in every facet of the business, we continue to see where we can shave cost and keep it at the lowest cost possible.
So sorry, to answer your question, yes, we’re going to focus on trying to get, if we can, below $4,000 a tonne. That will obviously be based on volume. If you get all your costs down, but you don’t get the right volume being sold, then your cost goes up given you’re spreading fixed costs over lower tonnes. So that’s a goal that the whole team is focused on throughout the company.
Thank you. There are no further telephone questions at this time. Due to a conflict with another company presentation, we will respond to a webcast questions by e-mail. I would now like to hand the conference back to Mr. Pérez de Solay for closing remarks. That does conclude our conference for today. Thank you for participating. You may now disconnect.