Pilbara Minerals Ltd (PILBF) Q1 2024 Earnings Call Transcript

Pilbara Minerals Ltd (OTCPK:PILBF) Q1 2024 Earnings Conference Call October 25, 2023 6:00 PM ET

Company Participants

Dale Henderson – MD, CEO & Executive Director

Vince De Carolis – COO

Luke Bortoli – CFO

Conference Call Participants

Kaan Peker – RBC Capital Markets

Rahul Anand – Morgan Stanley

Levi Spry – UBS

Alistair Harvey – JPMorgan Chase & Co.

Mitch Ryan – Jefferies

Kate McCutcheon – Citigroup

David Zhang – CICC

Robert Stein – CLSA Limited

Operator

Good day, and thank you for standing by. Welcome to Pilbara Minerals September 2023 Quarter Update Conference Call. [Operator Instructions]. Pilbara Minerals will be taking some questions from the webcast with the end of the call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Pilbara Minerals Managing Director and CEO, Dale Henderson. Please go ahead.

Dale Henderson

Thank you, Maggie, and a warm welcome to those who have joined us on the call today, in particular to our long-term shareholders. I’d like to begin by acknowledging the traditional owners on the land on which the businesses operate, which are Ngungaju people in the Perth, where we’re undertaking a call from today. Nyamal and [indiscernible] people where our operations are located in the Pilbara. We pay our respects to their elders past and present.

Relating to introductions, the speakers joining me on the call today are Luke Bortoli, our CFO; and Vince De Carolis, our Chief Operating Officer. Also in the room, I have a number of the team supporting the call.

As for the call today, what we’ll be stepping through is, firstly, a short presentation. I will aim to keep that to approximately 30 minutes. I’ll provide some opening commentary. I’ll hand to Vince for an update on the operation. I’ll then speak to the project expansion and chemicals updates.

I’ll then hand to Luke to let him take us through the financials. And then lastly, I’ll finish with some market commentary before we go into Q&A. For Q&A, we’re aiming for roughly 25 minutes of analyst questions and 5 from the webcast. And we’ll do our best just to keep this within an hour, as I know that there’s other calls people need to move on to.

Now in terms of opening commentary, the September quarter has been one of strong performance with the team delivering the plan. We’ve had strong operating performance, project delivery on schedule, and chemicals initiatives marching forward. This has been set against an industry backdrop of softening prices for the quarter and set against a broader global backdrop that has had plenty of concerning developments, inflation, Gaza and of course, the ongoing crisis in Ukraine to name but a few.

Whilst the environment has been uncertain for many, Pilbara Minerals sites have remained firmly trained on the long game opportunity in lithium. We are looking through this volatility to the longer-term structural deficit of the lithium supply chain that Pilbara is uniquely positioned to capitalize on given our scale, our operating performance, our industry experience and the incredible growth runway we have hit.

With that, I’d like to quickly recap on the strategy we’ve been pursuing. So moving to Slide 2. The pillars of our strategy are prioritized to generate the most rapid value creation for our shareholders and stakeholders in the order of, firstly, the operating platform. The operating platform is the engine room of Pilbara driving our returns for our shareholders and stakeholders. Secondly, we want to be growing that operating platform for expanding this incredible Tier 1 asset that we have carried off. Thirdly, chemicals. This is all about dovetailing our production into chemicals to realize additional margin per lithium unit, ensuring we have a more resilient business through downstream integration.

Fourthly, had a distant fourth diversification ultimately looking to diversify if and when an appropriate accretive extension is identified. The sum of these 4 is all in service of our vision to be a leader in the provision of sustainable battery materials products. And the quarter was solid on each legs of these strategies.

And I’d just like to now step to Slide 3 to pick out a few of the highlights for the quarter. Our production on plan for the quarter was 144,000 tonnes produced, noting that the first half of this year is all about the build-out of additional production capacity was the second half of the financial year, we’ll enjoy the benefit of that capacity build out, which, of course, will play through to larger volumes and commensurate reductions and unit cost.

Moving to sales. Sales was in line with that production. So we’re happy about that. Pricing. Realized pricing for the period was or USD 2,553 on an SC6 basis or USD 2,240 on an SC5.3 and noting that some of that pricing relates to sales very much in the back of the quarter. Moving to growth, a fantastic quarter for the projects team. P680, our Primary Rejection project, which increases production capacity by 100,000 tonnes, on track construction complete commission that we actually had first ore in the month of October.

The crushing and ore sorting packages on track and the P1000 expansion is also on track. Chemicals joint venture with POSCO for the 43,000 tonne lithium hydroxide plant is progressing forward, and we actually delivered our first shipment of concentrate this quarter, which is pretty neat as the team there gears up for the first train commissioning, which is to start at the back of the December quarter.

Midstream, our demonstration plant also achieved FID this quarter to the tune of $105 million, inclusive of $20 million worth of Australian grant funding. So another milestone in the chemicals category. And lastly, expansion. We had reserve upgrade, upgrading our reserve of 55 million tonnes to 214, a 35% lift. And then as it relates to moving beyond P1000, we’ve kicked off our PFS study for that, which is due for delivery back to market in the June quarter of this financial year.

So a very busy quarter, very solid performance across the board. And to offer a bit more insight, I’ll now pass the mic over to Vince for an update on the operations. Over to you, Vince.

Vince De Carolis

Thank you, Dale. So just starting off with safety. As you can see on Slide 5, our lead indicator, safety interactions continues to trend strongly. In the quarter, we ramped up our critical risk management training and awareness, and we’re continuing to see improved performance into FY ’24. Our TRIFR has decreased from 4.7% in the June quarter to 3.99% for the September quarter.

This is very pleasing as our safety program initiatives continue to gain traction with our people. And moving on to people and culture. We continue to deliver our commitments coming out of our cultural engagement survey. Just in the last quarter, we delivered a new mining precinct, which sets us up for now and into the future. We have a strong cultural program consisting of a purpose-built leadership development program, hiring leaders that align to our value set, hygiene and infrastructure improvements, just to mention a few.

And this is continuing to result in reduced voluntary turnover quarter-on-quarter. And pleasingly, female employment is also continuing to grow, as you can see on the slide. Now moving on to volumes. Production was in line with our expectations. Spodumene production for the quarter was 144,000 and 184 dry metric tonnes, and that was in line with our internal budget with a strong performance from mining in both processing plants.

As Dale mentioned, we also completed our P680 tie-ins and shut down successfully for Primary Rejection. And as a result, we’re now into our commissioning phase, which sets us up well for the remainder of the year. And with that, our full year production guidance is unchanged.

Sales in the quarter were 146 kilotonnes, consistent with quarterly production. We have now secured long-term access to additional storage at Berth 1 at Port Hedland which provides further capacity to explore product to market in line with our growth plans and mitigates risk to loading operations.

In processing a strong quarterly performance from both plants is attributed to total processing plant feed increasing by 6% above plan, and this was achieved with strong plant availability of 82% and utilization of 97%. We expect to see this continue to improve on the back of our asset management strategies, such as optimizing our shutdown cycles in the second half from our current 10-week cycles to a 12-week cycle, you’d increased uptime and revenue generation.

Recovery for the quarter was 67%, combined for both operations and marginally lower than the previous quarter, primarily due to the times of P680 expansion for the Pilgan operation and maintenance shutdowns for the Ngungaju processing plant.

In mining, we continue to improve our performance, achieving another record for the quarter just gone with total material moved of 9,152,000 wet metric tonnes versus 8,535 wet metric tonnes last quarter, which is a 7% improvement quarter-on-quarter and a 17% improvement from just 2 quarters ago.

Again, a great result, and we expect further improvement as we continue to deliver our mining uplift plan with key focuses in the coming quarters to improve productivity, being continued investment into newer fleet, improved payloads, improved road networks and systems and processes. On to costs, as anticipated, unit costs in the September quarter are higher as a function of quarter 1 being our lowest planned production quarter for the year, owing to the significant shutdowns to complete the key P680 tie-ins. And as already mentioned, secondly, the inflatory pressures across main input drivers such as diesel, labor and consumables.

Production volumes for the year are, of course, back ended. And as a function of the newer capacity we’re installing in the first half, our production in second half will continue to increase and supports reduced unit costs over the full year. And with that, I’ll now hand back to Dale.

Dale Henderson

That’s great. Thanks very much, Vince. Moving now to Slide 8 on Primary Rejection. As mentioned, a big quarter for this project, construction complete, commissioned and first ore occurred just the other week in the month of October. And most importantly, a safe delivery with no injuries. So a shout out and thank you to the Primero/NRW team who have been constructive for this piece of work. And really turn things around to deliver well and deliver on time. Thank you to that team.

Thank you also to DRA, our key engineering team who has been supporting the business since inception and of course, to our Pilbara team. Thank you, guys. Fantastic effort. The teamwork, the results focus, it’s a hallmark of the Pilbara culture and the way we work with our partners.

So well done team, and in particular, to Paul Laybourne, a Project Director, who’s been steering that work with the broader group. Moving to Slide 9. Just a quick update on the crushing and ore sorting plant are going well, very much construction world at the moment. You can see the picture on the right shows the concrete foundations, which have come out of the ground during the quarter.

Schedule going well, commission targeted for June quarter next year, ramp up September quarter next year, which is pretty amazing. And I think this time next year, we’ll be operating the world’s largest lithium ore sorting facility, which is pretty neat. You can see a schematic on the left hand side of the slide, which gives a bit of a pictorial of that. it is missing [indiscernible], by the way. That’s on the crushing north sorting.

Moving now to P1000, Slide 10. This is also going well, albeit we’re early in the delivery of this next leg of expansion. Detailed design has progressed on fabrication packages, bulk earthworks, construction contract was awarded to West source and the concrete construction contract is to be awarded within this December quarter. So plenty of activities underway and first of all, for this next leg of expansion is targeted for March quarter ’25.

Moving now to Slide 11. It feels like we’ve been looking at this slide a bit, but it’s hard to believe it’s only this quarter as well. The reserve upgrade a tune of 35%, a massive step-up in our reserve care of the drilling that we’ve done this past year. You see Johnny Holmes and his off-site at John. And the picture John Holmes is one of our founding geos there in the picture. So well done, John, looking forward to next year. We’ll see how we go.

Now moving from growth into chemicals, Slide 13. Just a quick reminder of essentially the different lithium product pathways that we have on the left, our spodumene concentrate, which is our core business today. Midstream, which is about an intermediate lithium chemicals product and then to the right downstream lithium hydroxide being battery grade feedstock product.

As it relates to midstream, the aim here is to generate a superior lithium intermediate product for market. The objectives around us are: one, adding more value at the mine site. And two, achieving this product through more sustainable methods in particular, reduction in carbon energy intensity. For a few years, been working on a novel processing route, which integrates an electric calciner [indiscernible] of our joint venture partner, Calix.

I’m pleased to say, study work has been great. Test work has been great, and we’re getting on with the next big step in this R&D project, which is a demonstration plant, of which we approved the FID this quarter on the second of August. So looking forward to seeing that project come to life. Construction commencement June quarter, ’24 was first product expected June quarter ’25. So bit of a longer runway, but is a key project which show strong potential for our business and potentially broader industry applications. So it’s pretty neat.

We’ll see how we go and we’ll be updating in due course. Moving now to Slide 14, POSCO. They kept the foot down, the build has been progressing well. And you can see an updated photo there on the left-hand side of our joint venture hydroxide plant coming together in leaps and bounds. Train 1, 77% complete as reported by the team in Gwangyang, South Korea and Train 2, 44% and complete as at the end of the quarter as well.

As I mentioned in my opening remarks, we have sent our first shipment over there to support commissioning. And what’s pretty nice is during this quarter, we will be attending an opening ceremony, which is pretty exciting and really an absolutely key milestone and the journey of Pilbara given that the bonds of this deal were cut in early 2018. So great that the dream is coming to reality and looking forward to being lithium hydroxide battery producer and short order. So pretty exciting stuff.

Now moving now to diversification and Slide 16. The the partnering process, a quick reminder here. While this was about as we went to market offering up to 300,000 tonnes of spodumene concentrate for the purposes of a downstream partnership opportunity. We were delighted by the strong interest we received. We’re now been working through those proposals narrowing the list, and we’ll be looking to update the market in the March quarter. But needless to say, there’s some exciting prospects amongst that list and we’ve got the good problem of working through those opportunities. That completes my update here. And with that, I will now pass to Luke to take us through the financials.

Luke Bortoli

Thanks, Dale, and good morning or good evening to those on the call. Please turn to Slide 18 of the presentation for a summary of the group’s key financial metrics for the September quarter. Group revenue was $493.1 million, a decline of 42% quarter-on-quarter, driven by a mix of lower prices and planned lower sales volume. Average realized price declined by 31% from USD 3,256 per tonne in Q4 FY ’23 to USD 2,240 per tonne in Q1 FY ’24. Sales volume was 146,000 tonnes, 17% lower than Q3 FY ’23, reflecting planned shutdown activity across maintenance and preparation for P680.

Speaking to production, Q1 FY ’24 delivered a strong quarter with 144,000 tonnes of spodumene concentrate produced. This was in line with plan, as Vince mentioned, despite being 11% lower quarter-on-quarter FY ’24 production is back weighted towards the second half of the financial year, in line with the ramp-up of the P680 Primary Rejection Facility. At the unit cost level, unit operating costs on an FOB basis were 19% higher at $747 per tonne versus $628 in Q4 FY ’23. This increase partially reflected ongoing investment in mine site resources in operational readiness for P680 and P1000.

More critically, unit costs in the current quarter were impacted by lower sales volume period-on-period. Unit costs will decline as production volume increases with the ramp-up to P680. Notwithstanding the increase in costs on an FOB basis, unit operating costs on a CIF basis were $1,004 per tonne in Q1 FY ’24, broadly in line with the prior quarter. The increase in operating costs reflected in FOB costs was largely offset by a decrease in shipping and royalty costs from lower sales revenue. Turning now to Slide 19.

The group continues to maintain a strong cash position with a closing cash balance of $3 billion as at 30 September, a decrease of 9% or $297.4 million from the previous quarter. Cash declined by approximately $300 million, notwithstanding the 2H FY ’23 dividend payment of $421 million being paid in the quarter. This reflects the strong cash generation of the business pre-dividend payment. A $421 million cash dividend was paid on 27 September, following the release of the company’s full year ’23 financial results.

Our cash margin from operations defined as receipts from customers less payments for operating costs was $360 million in the quarter, also reflecting the very strong cash generation of the business notwithstanding current lower spodumene prices. Key movements in the cash balance included cash margin from operations of $360 million, comprising net receipts from customers of $541 million, less $181 million of operating costs to produce and sell concentrate.

As we move further down the cash flow statement, there were — there was an income tax payment of $116.3 million, interest received of $40.2 million, cash flows for investing activities or CapEx of $176.1 million, lease repayments of $17.5 million and net proceeds from borrowings of $68 million and some other smaller items.

With current strong balance sheet position, the Group has flexibility to consider investment in a range of organic and inorganic investment opportunities and/or additional shareholder returns over time. While the Group has significant capital allocation flexibility today with all previously disclosed capital expenditure fully funded from existing cash reserves, market conditions have softened in a period where the Group is undertaking major capital investment programs.

In light of this backdrop, the Board is determined at this time not to proceed with a one-off capital management initiative. Going forward, the Group will continue to consider opportunities for further investment and/or one-off capital management initiatives and update the market at the time that occurs. I’ll now hand it back to Dale. .

Dale Henderson

Thanks very much, Luke for taking us through that. And we’ll now move to the markets, Slide 20. With regards to the lithium market, it remains challenging to read and it’s certainly consistent in this regard. Now although the market is difficult to read, I appreciate we have a unique perspective as one, 1 of the larger operators globally and our commentary is valued in our insights of value. I’ll break my comments into 3 broad parts. Firstly, some structural dynamics, commentary just to help people understand the landscape we deal with; two, observations of the current market; and three, some commentary around the outlook. So starting with the structural dynamics. Demand for lithium ion-based products continues to grow in leaps and bounds. I don’t think there’s any doubt about that.

Every day, you see more headlines supporting this. As it relates to the supply response, we are seeing this rush of groups endeavoring to participate within the supply chain and critical minerals more generally. But I’d emphasize endeavoring. We anticipate and observe the supply response will be challenged and slower than some are promising. The other part of the dynamics of the lithium-ion supply chain is, it’s very difficult to discern through a couple of different attributes.

One, it’s a disaggregated supply chain; two, there’s a lack of price transparency, which translates to a widespread of prices, which I know many of the analysts struggle to contend with, particularly seeing this as I say, a large spread. The other piece worth touching on is particularly within the Chinese market, we observe what we call momentum buying, which sometimes is at odds with fundamental stock levels. It can be waves of sentiment-driven buying and destocking.

This was further exacerbated by a large component of short-term contracts within the Chinese market. So historically, there’s been a rush of pricing upwards and a rush of pricing downwards. This all plays through to more volatile markets. So I look at a little bit of the elements around structural dynamics. So it’s not a straightforward landscape to navigate on the least. And it’s very much we think, symptomatic of, of a new industry moving forward and developing and maturing and it certainly is maturing and scale.

Moving to the observations of the current market pricing. As noted, yes, of course, we’ve seen a decline in pricing over the quarter from this — particularly since the strong highs of last year. And this, of course, is represented in our realized price. The pricing spread from across lithium chemicals and spodumene concentrate has been quite wide coming from some of the price reporting agencies although this does appear to be narrowing and settling.

One of the elements, which is worth highlighting is different producers to use different pricing mechanisms. And in our case, our pricing mechanisms, trail or follow the headline chemicals price quite closely. And we’ve offered some additional detail in the quarterly release, just highlighting the sort of 2-month period, of which our pricings are calculated on.

The reason for mentioning this is to highlight this is different from other producers in the market whom pricing mechanisms are longer dated. So as pricing rises, what this mean is Pilbara Minerals typically realizes those higher prices more quickly. Meanwhile others in the market are slower to realize those higher prices. And conversely, as pricing comes off, the reverse is true, where our pricing is typically followed more quickly whilst others have lagged.

And that is part of the explanation you see for the differences out in the market. Other observations for the current market from a demand perspective, most data points are very favorable. In particular, demand for EV numbers remain strong, both in China and abroad. When I have queried commenters in the space, they note that the growth is absolutely compounding. However, maybe not most recently may not have compounded at quite, the growth rates that are anticipated. However, directionally, the trend remains the same, very positive with increased adoption rates increasing period-on-period.

And that brings me to the outlook. The long-term outlook remains incredibly positive. And Pilbara is one of the longest-standing lithium operators in this young industry. We’ve always had our eyes trained on the long game. We have had historic periods of volatility and [indiscernible], we are unwaved in our approach, given we, as I say, have our eyes trained on the long term. And that’s because the demand is very positive. And just to highlight a couple of the more recent data points which support this benchmark minerals forecast of the global EV penetration will grow from 29% and 26% to something like 76% in 2040.

The China Passenger Car Association, CPCA, data highlights that China’s EV year-to-date growth was 37%, up from last year. The year-to-date EV penetration, 33%, which is an increase from 26% last year and the September quarter EV penetration was 35% being at all-time quarterly high. So we’ve shared those data points given that the Chinese EV market is a significant component of the global demand for lithium products.

And further to this lithium and critical minerals is continuing to receive more focus and support. Many will have seen the meetings occurring in Washington this week between the U.S. and Australian government, being the most recent example of the support and intensity to usher for this industry. which is pretty exciting to be involved in. Move from demand to supply. As I mentioned earlier, we expect supply to be challenged and higher cost. We’ve observed a number of countries with lithium projects the particular government regimes exerting changes across lithium development projects.

This fundamentally translates through to either reduced volumes, delayed volumes and in some cases, reduced economic returns or all of the above. Meanwhile, frankly speaking, [indiscernible] Pilbara’s advantage and enjoys being an operator in Australia with this Tier 1 asset, which is a great position to be in.

Also related to supply, we’ve observed challenges with project start-ups and ramp-ups. This does not surprise us at all knowing that firsthand the challenges of concentrating lithium are meaningful. So — and this was our experience. It takes time, and I don’t know of any example of a lithium project coming up easily. It’s a function of marrying the natural resource variation to a bespoke processing path that requires time, effort, test work and a team honing its skills over if not months, maybe years, depending on what you’re dealing with and Pilbara with 5 years of operating experience has been through that journey.

So for the outlook, given the combination of strong demand, challenging supply. It’s very positive for Pilbara and its shareholders. We remain focused on the delivery of our strategy to make the most of this opportunity. And this quarter is, they have been all about delivering on that strategy, strong operating performance, project delivery on track, chemical initiatives margin for the team remain very focused on capitalizing on this incredible market and making the most of our offering, a scale of our asset, our operating performance and the enviable growth runway we have a hit. We’re an incredibly good spot to weather any volatility you can capitalize on this burgeoning market, which is stepping forward in leaps and bounds.

Now with that — I’m pretty much on time. And with that, I’ll hand back to Maggie, our moderator to move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Kaan Peker from RBC.

Kaan Peker

Just a question on the market. Maybe — we the customers that you’re talking to. Are you seeing volumes being delivered into existing contracts and less spot sales? And on a follow-up on that, have you seen any changes to your pricing terms over the quarter, so in terms of pricing period and linkage to chemicals pricing?

Dale Henderson

Kaan, thanks for your question. As it relates to sales, our long-term offtakes are part of the course. As it relates to available production above that, we have been undertaking shorter-dated offtake, which have been coming through tender type process. So that’s been the mode of transacting those available tonnes of late.

As it relates to your question on have pricing mechanisms changed in the quarter, the answer is no. But I’ll just highlight, we do have periodic reviews which could be triggered by ourselves or a customer party they happen on a, as I say, a periodic basis, but that didn’t occur during the quarter past. So in the main, it’s just been a case of formulas following the market at this time.

Operator

[Operator Instructions]. Next , we have Rahul Anand from Morgan Stanley Australia.

Rahul Anand

Look, I just wanted to follow up on those couple of questions as my first one. Look, in terms of the pricing formulas, I just wanted to confirm if the provisional pricing existed in your contracted tons previously? Or is that a change? Or is that something that you’re seeing only with the uncontracted volumes that you’re having to place — that’s basically my first one. I’ll come back with the second.

Dale Henderson

The provisional pricing methodology, we’ve always applied that. And the principle we’ve had we priced provisionally and then it gets settled effectively in the future when the product is landing for the customer. .

And therein lies the challenge around understanding the final realized price because it’s a function of the market in the future. Maybe it goes up, maybe it goes down, maybe it stays the same. But just to reconfirm, provisional pricing has always been part of our pricing methodology.

Rahul Anand

And that’s across contracted and uncontracted time there?

Dale Henderson

Yes, correct. And with the exception of outright spot sales, the likes of the BMX actions when we’ve done those, and the — and the reason for using this methodology with customers is it effectively shares the pricing risk and uncertainty. That’s the basis of it. So it’s a preferred methodology between buyers and sellers would be our opinion. .

Rahul Anand

Okay. And then, look, you’ve obviously taken perhaps the correct decision in sort of holding back on that one-off payment in terms of your capital management strategy, especially given the CapEx profile and then also the potential further growth you can have. But what I wanted to understand more so was, how are you thinking about the downstream strategy as it has progressed through those bids that have come in?

Are you looking to take large portions of minority equity in downstream processing plants? Or is the strategy moving towards perhaps having a controlling stake in these things? I mean, how should we think about how this capital is going to be spent in your downstream, if you can give me some sort of idea on the size of investment and sort of minority or operatorship, that would be great.

Dale Henderson

Yes. No, I’ll offer comment and Luke might want to weigh in as well here. So as it relates to what we’re thinking about with the partnering opportunities, it really is too early for us to give any sort of guide around that. Sorry to disappoint in that regard. But obviously, it will all be revealed in due course. So far too early to take a view of any capital requirement there. Luke do you want to follow on? .

Luke Bortoli

Yes, I’ll just add to that comment that the Board’s decision to make no change to the capital management framework or undertake one-off capital management initiative was really driven by a desire to be prudent against the softening market backdrop. I don’t think you should draw a connection to M&A.

And the other thing I would say is that all current and projected discretionary CapEx is fully funded from our existing cash reserves. We have no concerns regarding solvency or liquidity. But again, the Board’s decision really was driven by a desire to be proven against this softening backdrop we’re seeing.

Rahul Anand

Okay. Just one follow-up there. The softening backdrop and the uncontracted tonnes and the spot sales. Is it fair to say placing spot sales in this — at this point in the cycle is much harder than what you have as your contracts?

Dale Henderson

No, no, no. The demand is absolutely there for product. And it hasn’t been a case of we can’t move product and certainly, none of our customers are not wanting product. Nothing like that. It’s just been more a case of moderating pricing and contending with this question of what is the price for the market. That’s where the shift has been. So no issues around volumetric movement. Is it different from where it was. Absolutely. It’s different from December quarter, where we had the fever of lithium buying and $80,000 per tonne chemicals, et cetera, et cetera. We’re not in that environment now. But it’s still a very healthy market and as Luke has outlined, we’ve had very healthy operating cash flows at this level. .

Operator

[Operator Instructions]. Next, we have Levi Spry from UBS.

Levi Spry

Maybe just a quick follow-up on one of those questions there. I thought we were expecting an update maybe on the second downstream this quarter, as part of the Strategy Day. Is that correct?

Dale Henderson

Sometime back, we have been guiding December quarter, but then we updated to move to the March quarter. You might be recalling one of the earlier releases. .

Levi Spry

Okay. And just on the price, hopefully, questions are focused mostly on this. It’s obviously the key driver and you’ve been a provider of a lot of transparency here, but as we got more data points, actually, it’s become more challenging for us perversely. How can you help us reconcile this quarter just gone? I noticed you’ve referenced 5.2% a couple of times and 5.3%. And you talk to GPs. Can we back some of this stuff out to get an untouched number to start thinking about how we forecast .

Dale Henderson

Yes, that’s the same [indiscernible]. sorry Levi. Two comments for you. At the very high level, fundamentally, the industry has this challenge of needing to move to more mature market trading methodologies. And it’s unfortunately utilizing methods which aren’t great for price transparency, we really need physical tradables market to allow efficient buying and selling trades. That’s actually the solution we all need. There’s more volume in the market. as a possible we might be able to create that time maybe, but it’s not here yet.

So that’s really the fundamental challenge, where that leaves us is we’ve got to use the price reporting tools, which are available to us and to yourselves and that’s where the issue is, of course, we’ve got this wide spread of different data points effectively reporting on the market. And then that’s further challenged by the fact that underlying movements have been pretty high and pretty quick as a function of a Chinese market, which then adds to the challenge.

So from a practical standpoint, our mitigation for that volatility and a means by which to work with our customers is our pricing mechanism of provisionally priced. And on the basis that nobody knows where the pricing may head ultimately, hence, that’s why we use that mechanism. I know that doesn’t help as it relates to your modeling and pricing. But unfortunately, there’s not much more we can do on that one.

Operator

Our next question comes from Mitch Ryan from Jefferies.

Mitch Ryan

I will keep this to one question, unlike others. Can you just give us some color on the timing schedule over the coming 12 months? I guess you pulled that out as having impacted production during this quarter. And as a derivative of that, can you also let us know what the current annualized throughput was in October?

Dale Henderson

Mitch, thanks for your 1 question, I’ll pass to Vince.

Vince De Carolis

Yes. Thanks, Mitch. Yes, in terms of primary rejection, the key times have been done. So most of the pain or all the pain of those times have been completed and done in the first quarter and done really well to plan. .

And now we’re in severe phase of commissioning primary rejection. And so that’s why the first quarter was always going to be softer. And then if you move to crushing and ore sorting, that then moves into the Q1 of the following financial year. So we’re in good shape going forward and we’re just basically getting on with the business of commissioning now.

Operator

Next, we have Kate McCutcheon from Citi.

Kate McCutcheon

I do have [indiscernible] price questions. Firstly, the study on the larger Pilgangoora above P1000, which you flagged for an update in Q4 of the FY. What level of study can we expect that? Is that a [indiscernible] study? Or is it more advanced? And what is that contingent on? Is it the reserve strike or port capacity? Any color would be great, appreciating that it’s quite early.

Dale Henderson

Okay. Yes, the study for stepping above the 1 million tonnes per annum is a prefeasibility study level PFS as to what are the constraints. That’s really the purpose of the study is to work through that.

So I’ve commented in the past that if there’s to be a construct it’s most likely mining give it and what we need to work through, and the team is working through is what is the maximum sustainable mine output that can be delivered from the mine. From that point forward, it should be a case of just matching everything up to that limit. But these are just my opinions. What we need to do is let the studies progress to work through to determine that outcome. So look forward to reporting, as you say, in the June quarter.

Kate McCutcheon

Okay. So — and then just quickly on realized pricing. So on an SC6 basis, you’ve reported a number that’s around $500 below 2 peers that have reported in the last 24 hours. And over the past 12 months, it’s been lower. Are contracts linked to Chemicals still the right strategy in your view? And what levers can you pull to maximize what you’re getting paid for your product?

Dale Henderson

Yes. Yes. Yes. No, it’s not lost on us. The differences against our peers. The cause of that, in our view, is — and obviously, we can’t be determinant is the slag effect, which I’ve commented on earlier around how our pricing responds. So that’s the reason for describing that. And you might recall during the December — September and December quarters last year, we feared very well as a function of that as the pricing environment is appreciating. Pilbara’s pricing was enjoying those benefits far ahead of some of our peers. Now that we’ve got sort of the reverse dynamic playing out at this stage. So who knows where they’re taking their pricing mechanisms, too.

But if ESG was to repeat and we go back into an upward swing market, who you might assume that Pilbara enjoys that more quickly and time will tell. To the point on chemicals versus spodumene pricing. Yes, there has been a bit of a dislocation between chemicals and spot pricing. However, we note that spot pricing is coming down. And we’ll see where it goes, but my guess is that it would ultimately converge.

And if you step back and you look at the pricing behavior across all of the product sets taking in both headline hydroxide and carbonate prices in the fullness of time, they typically come back into balance. At different times, we’ve seen hydroxide trade at a premium to carbon and vice versa and at different times to that same spot being unfairly priced against chemicals and vice versa.

So it is a bit of a moving feast, unfortunately, part of our disciplined approach in this space is a bit like the way we run our operations as we’re very diligent around the spread of pricing mechanisms across our customers and given that we are one of the largest operators globally and larger than some of the peers we referenced against.

We’re very prudent around this to make sure that we’re essentially hedging out the different movements that may ultimately unfold through those underlying different chemicals and other lithium products. So sorry if it’s a bit of a long answer there, Kate, but hopefully, the drills in some of the detail around the thinking.

Operator

[Operator Instructions]. Next we have Al Harvey from JPMorgan.

Alistair Harvey

It’s a good refresher in the release on the POSCO JV option mechanics to get to 30%. Can you just remind us of the cost to date given that linkage is to cost and any indication of what the accrued interest might be? And when you anticipate those 90% run rates to be hit there? .

Dale Henderson

Sorry, Al, I don’t have those numbers off hand for you. As to the run rate, we have put some guidance in there around that from memory, it’s about 18 months to ramp up. So POSCO has been potentially conservative in that regard. I guess time will tell on that one. But part of the rationale of repeating some of the mechanics and this quarterly update has been one of the questions arising — and we thought it would be good to restate it, given that we’re now closely coming into a commissioning and ramp-up period, hence, people are pretty keen to understand what is at the moment that Pilbara elects or not to step up for 18 to 30. So yes, I think with some really good mechanisms there, which really derisk the position for Pilbara and its shareholders. And we’ll see how we go. But from what we hear around POSCO’s progress, it’s going well, and we look forward to getting over there and getting on the ground and taking a closer look.

Alistair Harvey

Yes. And if I can, just a quick second one. I think you mentioned in your opening comments, diversification is kind of a distant fourth in your strategy. Just I guess there’s been a lot of interest in earlier stage exploration and development projects of late. Just wondering how you’re thinking in terms of ranking those versus established production assets?

Dale Henderson

Yes. No, good question, Al. No real rank in that regard. I think each of the sets explorer, developer, operator offer different pros and cons within the lithium world. Obviously, many more explorer options than there are developers or operators. So that really narrows the field. I think Pilbara, we’ve got a wide-angle lens as we think about where we might go and the reason for describing it is a distant force is just to reassure all of our investors and stakeholders that we’ve got our eye trained on — not taking our eye off the ball. We’ve got a hell of a organic growth path here, which is the envy of many.

The best thing we can do to create value most rapidly for our shareholders is to do a great job of bringing that forward and getting up the curve, enjoying the benefits of lower cost, higher volume. If pricing remains good, which seems could well be, we can continue to enjoy the strong operational margins onwards and upwards. Meanwhile, however, we should be building out the library and having an eye out for if there’s a good opportunity. But as I say, we’re in no rush.

Operator

Next, we have Robert Stein from CLSA.

Robert Stein

Just a quick one while I wrestle with you open. The decision not to pay back a special or increased capital management. Can we just get a bit of a background to your thinking there? Is it you’re buffering for lower pricing going forward? Or are you building up a war chest for some potential acquisitions? Or are you looking to proceed along the vertical integration journey?

Dale Henderson

I’ll offer a comment and Luke might want to underscore one of his points earlier. Part of the rationale for this disclosure was if you go back in time, we communicated to the market that we would have another rethink on the capital management. And the reason was we were printing incredible returns. So the market was rightly asking, gee, if this keeps going, you’re going to have a lot of bulging balance sheet like no other. Surely, you can’t hang on to all of that.

So we get to the market. will give us through to the December quarter, and we will run the rule and come back to you. What’s transpired is here, the market shifted, markets come back a fair, but so really the key output of that is to say we think the capital management framework, first and foremost, is very appropriate, offering the right balance of optionality to support our strategy. So a reconfirmation of that. And the second thing is in the eyes of the board is to be prudent with the available cash, as Luke described.

So it’s very much — that’s pretty much the long and short of it. It’s not a case of taking a particular prediction on the future or anything like that. Our strategy is our strategy, and there’s no other sort of looming aims at this point. Luke, did you want to add anything there?

Luke Bortoli

Yes, probably making the same point. However, the next 12 to 24 months comprise a pretty significant capital investment program That, combined with the softening market backdrop, the Board’s decision, I think, was just driven by a desire to be prudent while the market actually is soft.

Robert Stein

So it’s marked. So it’s probably more of a prudent move to retain your your financial flexibility, if pricing does stats off, obviously noting you’ve good experience in dealing with this in the past.

Dale Henderson

Yes, that’s right. .

Operator

Next, we have David Zhang from CICC.

David Zhang

My first question is just about some clarification on timing of your provincial pricing. So in your announcement, you mentioned that there’s typically a 2-month period to better align the final pricing with the time of delivery of product to the end customer. My question is does the time of delivery of product here referring to your spot being delivery to your convergent customers on the time of conversion plants leading chemical delivery to their end customers? Or in other words, does the 2 month period is designed to include both the time needed for shipping and conversion? What’s the logic behind?

Dale Henderson

David, good question. No, it’s all about the timing is all tied to when the vessel lands and port effectively, it’s all pegged around that moment in time because obviously, we have really good visibility on that while we don’t have as good a visibility is obviously beyond our customer, their interaction. So that’s the nature of the timing there.

David Zhang

Understood. That’s really helpful. And my second question is, we know that as at the end of FY ’23, you have nearly $800 million of tax payable and only around $100 million was paid during the previous quarter. So do we have any color on how the remainder will be paid. Would the majority be paid within the first half of FY ’24? Or there will still be a large portion to be paid in the second half?

Dale Henderson

The tax payment that relates to FY ’23 income tax to be paid early December this year. So the $770 million approximate number that you referenced that we paid in early December.

Operator

That is from the audience questions. We can now move on to the web questions.

Unidentified Analyst

Okay. The first question is, why is there such a high shorting of PFS shares on the market around 15%?

Dale Henderson

Luke, do you want to take that one?

Luke Bortoli

Sure. I can start, and Dave can add some comments as well. It’s a good question. We think this is a reflection of the success and prominence of our business. So Pilbara, as everyone is aware, is the largest pure play lithium producer globally. And it is a good place, therefore, to trade and short the lithium price. So we think that it’s really driven by a portion of the investment community that’s looking to short the lithium price as opposed to something that’s related specifically to Pilbara itself.

Dale Henderson

Sure. Nothing to add there.

Unidentified Analyst

The next question is, do you see your cost of production going up further in this current quarter?

Dale Henderson

So we’re comfortable with the guidance we’ve got for the year. As Vince outlined and some of the comments I outlined, the first half of of this financial year is all about getting the bill done, which is a little bit disruptive and obviously less volume given that, that capacity isn’t installed and operating in contrast to the back half of the year those tie-ins are down, the capacity is integrated, and we will be enjoying the benefits of that higher volumetric production. So feeling okay about our guidance for the year.

Unidentified Analyst

Okay. Next question. Can you get funding from the U.S. from the inflation reduction fund?

Dale Henderson

Yes. Great question. And one we’ve better eye on, and we watch the space with interest given the collaboration, which has been emerging between Australia and the U.S. As many will know, the U.S. has got an incredible war chest of funding that they’re deploying to us and the energy transition, some of what we heard friendly partnering countries like Australia could be well positioned. We’ve got more work to do to understand that, but we certainly got our own.

Unidentified Analyst

Okay. Next question. International advisories forecast lithium pricing in the 2- to 3-year frame — time frame unduly pessimistic particularly as it relates to present opportunistic stock valuations.

Dale Henderson

Great question. And to answer that, I’d just like to go back in time and talk about who forecast the price rises in September and December quarter we had last year. There wasn’t many — and I think I don’t think that’s necessary — why wasn’t there? I don’t think it’s necessarily a case of any particular forecast or couldn’t see — I couldn’t see coming.

We’ve got the establishment of an industry occurring. And because of that, it’s very hard, I think, to predict the growth rates. And in particular, some of the new product sets, for example, battery energy storage is particularly hard to get a read of the growth of the market, given it’s a brand-new market.

EV, some think is a little bit easier and that the addressable market being internal combustion engines is fairly well known in aggregate, that’s rich and data, but battery energy storage is wide open and very challenging. So out of all that, it means that forecasts are incredibly difficult. I mean the space comes form the birth of an industry and then you might say, well, what gives a Pilbara much conviction around the space. Well, we see the grassroots investment directionally. We see the incredible uptake of these superior product types.

That gives us lots of comfort. And then part two, we’re a major operator with scale and a low cost base puts us comfortably at the lower end of the cost curve. So for us, we see it as more of a case of our operating margin rising and falling as a function of the underlying lithium market growth. So because of that, we think we’re in a very strong position. And the best thing we can do is get on with our growth path to continue to reduce across those, bring all lithium units to market. Out of that are some of the forecast is probably too pessimistic probably, be my view.

All right. Thank you for those questions. We were over time. And just to wrap up, I appreciate everyone dialing in and the notes of support and inquiry we have been receiving, the September quarter has been one of really strong performance, getting on and delivering the client’s strong operating performance, project delivery on schedule and chemicals initiatives marching for. We remain focused on delivering our plan. Thank you all for dialing in, and we look forward to future updates. Thank you.

Operator

Thank you. This concludes today’s conference call. Thank you all for participating. You may now disconnect.