Pilbara Minerals Limited (OTCPK:PILBF) Q4 2022 Earnings Conference Call August 22, 2022 11:00 PM ET
Company Participants
Dale Henderson – MD and CEO
Brian Lynn – CFO
Alex Eastwood – Chief Commercial and Legal Officer
Kate Bell – Team Director & Senior Consultant, Read Corporate
Conference Call Participants
Mitch Ryan – Jefferies
Hayden Bairstow – Macquarie
Al Harvey – JP Morgan
Kate McCutcheon – Citi
David Radclyffe – Global Mining Research
Glyn Lawcock – Barrenjoey
Matthew Frydman – MST Financial
Operator
Good morning. Thank you for standing by and welcome to the Pilbara Minerals Full Year 2022 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to Mr. Dale Henderson, Managing Director and CEO. Please go ahead.
Dale Henderson
Good morning, good afternoon, and good evening, depending where you’re dialing in from. And thank you all for dialing into our FY ’22 financial results call. Within the room today, I have with me Brian Lynn, our CFO, Alex Eastwood, Chief Commercial and Legal Officer; David Hann, and Investor Relations Advisor and Kate Bell from Read Corporate.
In terms of the call today, I’ll be taking you through just some broad opening commentary on the year, which was, I’ll then be handing to Brian who will speak to the financial outcomes and offering some more insight there. And then to finish, I’ll offer some commentary on the FY year guidance and some commentary on the market. And lastly, to finish, we’ll open the floor for some questions.
So starting with sort of the opening commentary for the year, we’ve had. It’s been an absolutely transformational year for Pilbara. And I refer to Slide six. And the numbers, frankly speak for themselves. Our revenue $1.2 billion, a 577% increase on the prior year, and an overall profit, operating profit of $561 million, EBITDA of $814 million, and cash in the bank of $874 million. So, an absolutely incredible year for the business, and on way continued.
And really what the behind — what’s behind this that shows that some of the strategies that business have had in play are now paying off, strategies which have been in motion for many years, delivered with discipline and been timed well and the fruits of that are starting to be born, now on the results I just mentioned.
Now I want to speak to sort of three parts of our strategy. Firstly, with their operating performance, we’ve had a good year, 34% increase on production from the prior year, 378,000 tonnes made up of the Pilgan operation and of course the Ngungaju operation which has been in ramp up mode during the financial year.
And as it relates to the Ngungaju operation, formerly the Altura operation. FY ’22 has really been the year where the benefits of that acquisition have been starting to be born. Obviously, there’s been the production being able to get that production into market quickly if the market turned. In ore reserve we did a big increase in October last year, a 54% increase in ore reserve to 163 million tonnes. So, key benefit of that acquisition. And the transaction itself just to remind everyone, only completed in January ’21, last year, Australian 240 million. And in the year just been $145 million of gross operating margin was contributed as a function of bringing that asset to life. So, absolutely, that Altura acquisition is bearing fruit for the business and by extension our shareholders. So, delightful that Management is being able to bring those benefits through for that acquisition.
Moving from operating performance to expansion. The P680 Expansion Project was approved by the Board. So the team is busy underway, are progressing that project. And then there’s the P1000, which will bring our total production capacity up to a million tonnes per annum. That FID is still targeted for December this year. So looking forward to those next legs of expansion.
Moving from expansion then to our other value creation mechanisms. This is essentially around chemicals participation. Well during the year, the POSCO Downstream joint venture was consummated, finalizing April ’22. And that that piece of work would have been a long time in motion with discussions of course, getting knocked back in 2018. So here we are underway with POSCO for their joint venture, Downstream plant in South Korea with that 43,000 tonne Lithium Hydroxide processing plant.
So, POSCO busy underway commencing construction for their project. And we look forward to the benefit of being an economic participant in that Downstream plant, flying through to the business into our shareholders.
Also in the value creation chemical space was our Midstream project. During the year working with Calix, so we delivered the scoping study for that work. We’re also successful in $20 million grant being approved to contribute towards the demonstration plant, care of the Federal Government, and yes, we progress that project as quickly as we possibly can.
And we like what we see. And of course, just remind everyone, the Midstream project is all about producing a value added lithium salt, value added and it concentrates the lithium up, leaves the aluminum silicate weights in the mine site. And does it in such a way to materially drop the carbon footprint. So we’re pretty excited about that project, it is in R&D, and we’re progressing that as fast as we can. But of course, all of those — yes, it was progress during the year just been.
Lastly, around strategies, which have been paying off was BMX. Hard to believe this only kicked off in the year, which has been. BMX, just to remind everyone, when we went into sort of exploring and deploying the battery materials exchange thing, a version of eBay for battery materials. The hypothesis was, gee, we think a live marketplace will go well, we think potentially it will extract a higher margin through providing a more efficient marketplace.
Well, we will certainly prove to be correct. And that was from the first auction being in July last year. That went well. And then the seventh subsequent auction since of all going well, extracting a material premium above the market average. So we are looking forward to continue to deploy the battery materials exchange in the year ahead. And with stronger and higher production profile to the combined operation, we’ll of course have more product we can in that direction.
So, an absolutely phenomenal year, which has been through the strategies I just mentioned, the operating performance, expansion, value creation and chemicals and results of all of the above applying through to a great set of results that we’ve just reported.
Well further ado and offer a bit more detail on our financial outcomes, I’ll hand over to Brian.
Brian Lynn
Great. Thanks, Dale. And Hello everyone, and thanks for joining the call. Probably will start just by offering some high level commentary on the financials. And then I’ll move into a bit more color around the profit and loss and balance sheet outcomes for the FY ’22 year. So if I can just start by visiting five, nine of the investor packs. And just to repeat what Dale just said and recognize that the FY ’22 year has certainly been a transformational year.
It’s — the results reflect not only the positive market conditions for the battery raw material industry but, also the initiatives that we undertook as a business over the last two to three years. Some of those initiatives foundries bulk of effort but largely from it certainly what generated my interest in the business it was clearly the Pilgan’s plant improvements where we increase capacity of that plant. We’ve restarted commissioned and currently ramping up in Ngungaju plant, the old Altura assets. And we also completed the POSCO transaction. All of those you’ll see will stay tuned in the discussions around the financial results.
So for the year the Company was able to deliver more tonnes than the previous year. In a market that was buoyed by strong demand for raw materials. And particularly, that demand was particularly strong in the second half of the year. And strong demand conditions obviously presented a very strong and positive pricing environment, which allows the Company to deliver around about $1.2 billion of revenue and EBITDA just shy of $115 million. And an inaugural full year profit after tax of $561.8 million.
On the back of the strong EBITDA results, we’ve closed the year with cash in the bank of $591.7 million and if you include the local level of sales or credit for shipment that every sale, that balance increases to $874.2 million. So very, very strong cash balance and balance sheet at the end of the year.
Turning to some commentary on the profit and loss, now referring to Slide 11 of the deck. Again, boy marking conditions purely meant that we’re able to sell more products at a higher price. And the sum of all that means that we ended up with a substantial improvement in gross margin from operations of just started higher than $850 million for the year. And it’s probably worth noting that about $680 million of that was actually generated in the second half of the year when we obviously saw the significant improvement in pricing conditions.
We shipped the batteries and 51,000 tons of concentrates at an average realized price after adjusting for lithium units of $2,382 a tonne, CIF China or an Australian dollar terms that was $3,295 a tonne We’ve tried to handle it, significantly improving in the second half of the year, where the price was taken half in Australian dollar terms realize it’s $4,700 compared to the third half where the price was an Australian dollar 1,700 per dmt.
It’s probably worth noting that the price that I’ve just quoted does not include some foreign exchange gains, which we include in our profit or loss due to the accounting rules, the exchange rate that we realized for revenue is based on the date of the ship sales, any movement between that date, and when we receive the cash is recorded separately as a foreign currency gain rather than revenues, and that was worth about $21 million for the year. So $21 million of revenue that was recognized as a foreign exchange gain.
In terms of just looking at the respective plants. The Pilgan plant contributed about $708 million of the gross operating margin from 315,000 tonnes of product sold. And as Dale mentioned, the Ngungaju plant contributed $145 million to the gross operating margin on the sale of just shy of 46,000 tonnes of product sold.
And that’s quite phenomenal when we think that really that operation was largely in startup commissioning in ramp up mode during the journey. And yet, at the end of the year, it’s almost pay back half of the purchase price. So, that is something worth noting.
The actual operations of the Company, we’re challenging on a number of fronts, and those are reflected through in the cost that we achieved. And it was particularly in the second half a year. So we found that the operations were impacted by COVID 19, when the borders opened in the second half of the year. Clearly we were our staff and contractors were impacted by COVID-19. And that just meant that we the matting levels were had a costs of sight were lower than then we would have aligned which meant that we couldn’t optimize our operations and run as efficiently as we would have wanted to.
This when we combine that with just the tight labor market, and just general inflationary cost pressures, particularly around diesel fuel and ocean freight and reagents, meant our costs were higher than they had been. So Pilgan plant costs for the year, excluding royalties and freight was an A$55 a tonne. And then the higher realized selling price, and then the high cost of freight means that the cost on a CIF China basis that time was A$844 per tonne.
Clearly Ngungaju operating cost that we haven’t quoted a cost per tonne, because it was in a start-up and ramp up mode. But clearly because of that the cost for the operating for freight in Ngungaju were higher that expectation is that those costs will now come down to a more normalized level, once that plant is fully ramped up to 180,000 to 200,000 tonnes nameplate capacity.
So after accounting for corporate costs around $21 million exploration and feasibility costs about $40 million were generated and EBITDA, $815 million. And accounting for depreciation and other asset write-downs of about $46 million. We generated an EBITDA of just shy of $770 million.
Now, it’s probably worth talking through a couple of significant but non routine items that that did impact the profit loss account. The first relates to the recognition of prior tax losses. Now, because we’re able to generate such a good operating result for the year, we’re able to recognize tax losses from prior years. And that basically meant $66.3 million benefit to the bottom line net of deferred tax balances.
On the flip side, we also recorded a non-cash cost of $37.2 million. And that related to the deferred consideration on the Altura acquisition. If you remember, part of that consideration was the agreement to issue shares on a deferred basis. Those shares were issued during August and October in the year. And that $37.2 million really represents the movement in our share price between the first of July and the date that those shares were actually issued. Taking into account, we achieved an over profit after tax of $562 million, which we think is a very good result.
Turning to just the cash flows for the year, so now I am on Slide 12 on the deck. Clearly the strong operation performance generated a significant improvement in the cash balance. And as I said before, the cash balance at the end of the year was $591.7 million, which is $492 million increase over the prior year. And we increased — it includes our letters of credit. Cash balances $874 million, which represents a $758 million increase from the prior year.
So major cash movements for the year, just shy of $650 million of cash flow was generated from operating activities. Now that number does not include the impact of the letters of credit. We spent about $128 million on capital investments within the business largely on the Pilgan plant improvements. The restart commissioning and ramp up of the Ngungaju operation and also on the capitalized waste development that we’ve been undertaking to ensure that we deliver the right amount of ore to the [indiscernible].
The cash flow is also a reflective of a net $3.6 million inflow of cash, buying the completion of the POSCO transaction during the year, which we think was — which was a very important transaction for us to bear down and it allowed us to invest in a downstream chemical facility in joint venture with POSCO. So the Company was required to pay $76 million for its 18% equity interest into that joint venture. So this was actually funded by a $79.5 million convertible bond provided by POSCO, so because of that, we actually had a net inflow of $3.6 million.
Turning to just some comments on the balance sheet, so Slide 14 of the deck. Clearly, the cash generated by the business has transformed the Company’s balance sheet we’re in a significantly healthier position than we were 12-months ago. We’ve invested $146 million back into the business on all the things I just spoke about. It’s a waste improvement being capitalized, the restart of Ngungaju and the Pilgan plant improvements.
And as a result, we’ve ended up in a very healthy cash position. If we look at the net cash position, net of debt, we have a balance of $432 million, and when we put a letter of credit, the net cash position is $714 million. So clearly a very significant improvement in our balance sheet, and certainly that improvement throughout the year as has allowed the decisions around expansions to be made and we have now committed some of that money to the recent announcement on the expansion of the P680 project.
The Pilgan plant, the idea is to generate around 100,000 tonnes of spodumene concentrate from the Pilgan plant. And as we look to the next six months, we still say that the economy is strong, so we’re generating further positive cash flows. And we’ll be looking to that, as well when we think about decisions around the P1000 project later on in the year.
So that’s all the commentary I wanted to offer on the financial results. Now I’ll hand back to Dale.
Dale Henderson
Good. Thanks, Brian. Much appreciated. Just to offer some comments on guidance for the year ahead, Slide 16. From a production perspective, we’ve detailed a range of 540,000 to 580,000, dry metric tonnes. That of course, is the combination of those of our two processing plants, essentially running at nameplate. So that’s as it relates to production volumes.
From a unit cost perspective, we’ve given a range of A$635 to A$700 per dry metric tonne. And also just flag that we’ve highlighted beyond FY ’23, we are anticipating to see some cost decreases as a function of strip ratio decreases, nameplate performance, and synergies that we’re expecting to be realizing by the time we move beyond FY ’23. So moving from guidance, probably the last thing to add there is we have given some detail on capital expenditure as well, on Slide 16.
Now moving to Slide 18, some general market commentary. What we see is really positive from all the indicators, we have access to the business. Starting with our customers, strong demand remains from all corners. If we could produce more, they would take more. As it relates to new customers, inquiry continues thick and fast from all corners. And the most vivid example of this, of course, is our battery materials exchange options which I continue to be heavily contested and long may that continue.
So, from those data points, strong market support. And then beyond that, what we see is new entrants scrambling. Some of the OEMs obviously in the headlines more and more every day, scrambling to knit together their supply chain solutions. But of course, as one of the few operating producers in this space, we get contacted a fair bit. And as you’d expect, we have a bit of insight just to the problem they’re trying to solve for here. But it’s fair to say activity levels have definitely been increasing in that regard.
And lastly, in the market piece, of course is the pricing. What we observed through the reporting agencies is strong support. We note the chemicals remained buoyant around that $70 per kilogram and above the lithium chemicals. And we know that a lot of the market commentators are predicting short term to mid-term outlook to be very favorable. And we tend to agree I don’t see anything to counter that in the near term. So long may that continue.
So that completes with my commentary on market related elements. And, so lastly to finish here, what a transformational year for the business. Absolutely brilliant to see the benefits of some strategies, which were really born from the inception of the project and the business really starting to bear fruit. And that strategies which have been delivered with discipline. And of course timed well, and what I mean by timed well as, here we are quickly ramping up of the Altura asset into the market screaming for lithium units with a strong pricing, so very well timed and the credit to all involved within the business.
And to that end, I’d like to acknowledge the team and the contracting partner involved in that business. It has been a tough year. Of course, everyone’s contended with COVID. No one’s been immune to that. But it’s also particularly tough when you’re trying to ramp up an operation recruit people in a lot more activities within our business. So we’re just delighted to see that ramp up going well, the Ngungaju assets and a big shout out to the operating team and all involved within the business who made these results happen.
I also like to acknowledge our shareholders and particularly those ones who have stuck it out who stuck with Pilbara, road the journey, road the downturn. And here we are on the other side of that, so I really feel thank you and shout out to you for having the conviction and the wherewithal to sustain, sustain that downturn and stay the journey and delighted to see the benefits of that flowing through to the share price appreciation of the Pilbara, rightly deserve.
So, lastly, in the thanks giving category, here to the Board, contracting partners, all the shareholders, thank you so much. It’s been a great year, businesses, for us like none other to capitalize on this incredible market that we’re stepping into. And it’s just an absolute delight and long may continue.
And with that, I conclude and like to hand back to Melanie, for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Mitch Ryan with Jefferies, please go ahead.
Mitch Ryan
Good morning, Dale and team. Thanks for taking the questions. Can you give us some color on the grade implied in the guidance, it was basically the 5.5, right?
Dale Henderson
So the grade we’re anticipating will be approximately around 5.5. Mitch, we have widened it slightly and in particular, through the June quarter we had an average of approximately 5.4 as a function of ramping up the Ngungaju operation. But the trend we are on is to move down that grade curve purely and simply to maximize lithium units from the operation. I think for now, 5.5 is probably a fair number to utilize.
Mitch Ryan
If you do trend down that great curve, would you expect increased tonnes?
Dale Henderson
Correct. Yes, that’s the mission maximize yield and we would expect some tonnes. The actual quantum is hard to estimate, it’s a function of the mineralogy and where we’re at in the mine plan that becomes a bit challenging to guide as to what the benefit will be. But the broad principle of dropping down product freight and yielding more product as a function of that holds true.
Mitch Ryan
So if we turn over on an LCE basis, we’ll see range, the LCE range could potentially increase largely?
Dale Henderson
Correct.
Mitch Ryan
And second question, the capitalized wastes pulled that out inside the guidance. Can you give us any color as to sort of beyond FY ’23 is it very specific to’23? And then it sorts of harkens back to a much lower number or does it sit at that level beyond FY ’23?
Dale Henderson
I first speak to what the mine plan looks like physically and then offer a chance to Bryan to comment on the numbers. From a mine plan perspective, the year we’re in is the year of developing the pits further while that looks like it’s for now southern pit will be doing more waste movement and are kicking net up further.
And we are also looking to open up what we call the Eastern pit is the name sort of alludes to it’s east of where our central pit is located. So we’re looking to develop that, that’s in the year we are in. And then past this year and to the following year, that development both volumes will taper off and we will look into step back strip ratio.
Bryan, would you like to comments on those numbers.
Brian Lynn
Yes, I’ll say yes, the waste mining beyond FY ’23 is going to come down. So, I think for FY ’24, I would expect that the number would be probably 30% to 40%, lower than FY ‘ 23 based on the current mine plans that we have.
Mitch Ryan
That’s more two of there, I’ll come back around. Thank you.
Operator
Thank you. Your next question comes from Hayden Bairstow with Macquarie. Please go ahead.
Hayden Bairstow
Morning, Dale and guys. Just a couple for me, firstly on capital management balance, so no mention of that. Cash flows, obviously now really strong just we’ll likely to see something at the AGM or something that Board might talk about in terms of whether there’ll be a policy implemented on that front?
And just secondly, then on CapEx, just outside of your Pilgangoora CapEx just talk about potential spend on Calix, or is there risks of a JV further call into the POSCO JV to fund the rest of that plant as well in the next couple of years? Thanks.
Dale Henderson
Sure. Thanks, Hayden. As it relates to capital management, probably unlikely that we’ll be guiding at the AGM. But what we’ve indicated to the market is certainly December or before we will give some insight into Capital Management. As it relates to CapEx, was put on the guidance there is what we’re expecting. The Calix JV project will address that on its merits. But as you are aware, we have already with the $20 million grant funding that’s late at the year, we’re not expecting necessarily huge contributions, certainly relative to revenues, we’ve got to the business.
And then as it relates to POSCO, we’re not anticipating any requirements in the near term for that. Bryan, did you have anything you wanted to add?
Brian Lynn
No, no. That spot on. Certainly, on POSCO, I wouldn’t expect anything, certainly in the next 12 months. And then, in the number that we’ve guided to that includes the studies that we need to continue to undertake on the Mid-stream project, at that point, we’ll then obviously, work up a fit on a demo plant assuming that is the next step, which we think it will be. And at that point, I think we want to guide to the market and determine what the CapEx might be.
Hayden Bairstow
So the rest of the funding of POSCO it’s all pulled down to completion, or do you think there might be if they can’t put up more debt into it that there’ll be another call next year?
Brian Lynn
No. At this stage, our expectation is that there won’t be another call. So the only thing that might cause there to be another cause if there is — if there’s a big blowout in CapEx. But even with that, the way it has been set up by POSCO would be gearing is that they have allowed for additional debt to cover any sort of CapEx increase, they would have been quite to be capital blowout for there to be a further cash call on that. Our expectation today is that there shouldn’t be another equity contribution from us.
Hayden Bairstow
Okay. Got it. Thanks, guys.
Operator
Thank you. Your next question comes from Al Harvey with JP Morgan. Please go ahead.
Al Harvey
Good afternoon, Dale and Bryan. Just a couple from me. I guess you’ve got to pay 1000 FID in December this year. I’m just trying to get a sense of how soon after that FID, you could begin construction in the current environment. And if you’ve had any concerns around that timing since beginning P680?
Dale Henderson
Yes, on that one, as it relates to construction. The insight, we have it’s been really positive as we engage with contracting partners around the P680, and the feedback we’re getting is in both cases, the P680 project and the P1000 as it relates to capital projects are not actually that big compared to the major iron ore expanses by example, you’re typically getting WA. So, because of that, we’re actually able to access a bigger pool of medium to small construction contractors who could support it. So, we feel as a function of the size of the project, we’re in fairly good position.
That being said, of course, the WA market outright is short on people that that issue is definitely there. But of course, we’ll look to mitigate that through early engagement with the market around developing those plans. Timelines for delivery for us. We worry less about securing construction personnel, and we worry more about procurement of long leads as a function of supply chain disruptions more broadly and globally, and mining generally being fairly buoyant. And, of course, we’ll look to mitigate those through early orders.
Thanks, Al.
Al Harvey
Yes, thanks, Dale. Maybe just one more quick one. I guess you mentioned capital returns, probably going to get a sense of that by December, will that include potential for other growth opportunities, like, M&A, or other things like that? Or is it will that only be around dividends and buybacks?
Dale Henderson
So the full spectrum of options will get considered by the Board, Al, as you’d expect, and yes, we’ll give some insight, so to what that looks like at the end of the year.
Al Harvey
Thanks, Dale.
Operator
Thank you. Your next question comes from Kate McCutcheon, with Citi. Please go ahead.
Kate McCutcheon
Hi, Dale and Bryan. Previously, you’d given some longer term CIF guidance around 340 to 375, I think U.S. Do you have a sense the way your longer term budget costs fit now, I know you said you’re expected cost to come down over the next little half whether its longer time across might fit now?
Dale Henderson
Yes, great question, Kate. And we watch with interest as we have the various forecasters that are grappling with this issue as to the long run pricing. And what we’ve elected to do as a business is we’ve typically gravitated towards benchmark minerals, our books in the space as a guide to what the long-term pricing looks like. But of course, we certainly take a look at all the various commentators’ analysis in this space, and please to see, the trend is on the up, which we tend to agree with.
Kate McCutcheon
Okay. And in terms of CIF costs the Pilgangoora. So I think, at some stage you told the market longer term costs would be on that U.S. $350 a tonne. Is that still think about that asset now have they come up? Give me a little insight about that.
Dale Henderson
So Calix gravitating to revenue, so I think [indiscernible]. As it relates to cost, we will look for the long run outlook for cost. We will guide again on that coincident with the expansion given that there’ll be a reset of variables at that time, but we haven’t booked to restate that long run cost guidance recently, given the moving parts.
Brian Lynn
Kate, its Brian. And probably a couple of points. Look, it’s very high economics in the current market to get a firm handle on where costs are going to land in the next sort of 12 to 24 months. The couple of moving pieces, I think that we can’t control is around the amount of waste movements. So in FY ’23, we’re doing a significant amount of waste moment compared to how we received going forward.
So, expectation is that we would see somewhere in the order of about $100 reduction in cost per tonne for the level of waste movement, they will need to do beyond FY ’23. And then I think the other area which we’re sort of expecting will eventually come down is around ocean freight, but it’s just hard to tell.
So you know right at the moment, ocean freight is somewhere between $50 and $65. But if you look back in history, it’s sort of been more about the $20 to $30 mark. So we expect that to come back. So I think those two things will change the dial compared to what we’ve forecast for FY ’23, but just hard to see where sort of all the other costs are going to go right at the moment just given the inflationary pressure.
Kate McCutcheon
Yes, that’s helpful. And then Dale, I know you are itching for pricing questions, so you haven’t given up the pricing expectations for the coming quarter. Usually you do what’s driving that? And can you remind me when your next BMX auction is scheduled, some color on what you’re hearing about inventories in the market? Because spodumene practice has come up a bit recently?
Dale Henderson
Sure, as it relates to the next BMX auction that likely to be next month, and will likely look to run those auctions probably on a monthly basis for the next wall, depending how we go. As to pricing, as I mentioned earlier, in the market commentary, we’re not saying anything to disrupt the current levels. And we watch with interest as everyone else does.
Operator
Thank you. Your next question comes from David Radclyffe with Global Mining Research. Please go ahead.
David Radclyffe
Hi, good morning, everyone. So I just had a follow-up question on the mine plan and material movement. Just trying to understand what the debt number of tonnes you anticipate moving is in FY ’23? And what sort of capacity you actually have to move tonnes?
Dale Henderson
Sure, thanks, David. So as it relates to capacity, we have been ramping up an owner operate fleet, utilizing, SMS, and MBS, MBS for drilling. And we have the required fleet to kick them on plan. We have had a challenges around at different points of time around manning that fleet, and not so much around truck drivers, but at different points of time. Key skills around excavators or dozer operators of late, which of course, we’re targeting and resolving, but we’re not anticipating to have any issues around delivering both mine plan movements.
David Radclyffe
Okay, so then, should we think of FY ’23, as representing — fully catching up on those waste tonnes? Or is there more maybes come in ’24. And then at current prices margin, is there any sort of thought to sort of extra stripping for P1000? Or just to get ahead in the good times?
Dale Henderson
It is definitely some thoughts about the P1000 stripping readiness, largely, that’s built into the plan, David. So what we have in the mine plan is essentially more movement for this year, and stepping down next year. But of course, it’s always subject to change and depending on when we update the block models, depending what maximizes economic returns, if there’s always potential that we could change that mine plan, but the outlook, the stages more movement this year, and then dipping down a little bit next year.
David Radclyffe
Okay. And maybe if I can, just a follow-up. With two plants running, you’re guiding to sustain capital around that sort of $35 million level of just under. There’s sort of a lot going on on-site, and you’ve got the inflation impact. So by the time sort of P680 in circuit so running, where do you sort of see that sustaining capital, hopefully settling out to?
Brian Lynn
David, its Brian. I think my expectation is that now once you’re done P680, it’s not going to add a significant amount to sustaining capital or increase a little bit. I think that level that we’ve guided to for FY ’23, you’ll probably increase it by in the order of 10% to capture P680 as well. So that’s sort of our expectation.
David Radclyffe
Thanks. I’ll pass it on.
Operator
Thank you. Your next question comes from David Feng [ph] with China International Capital. Please go ahead.
Unidentified Analyst
Hello, hi, good day. This is David from CICC. So my first question would be, we’ve seen that the gross profit margin of Ngungaju was slightly lower than Pilgan and that’s mainly due to ramp up of auctions. So, would you expect this difference today eliminated in FY ’23, given that the ramp up of Ngungaju is almost finished?
Dale Henderson
Yes, so David, absolutely Ngungaju with higher cost being in a ramp up here. And once both operations at nameplate would anticipate that the Ngungaju operation is slightly higher cost as a function of doesn’t have quite the scale with the Pilgan operation does. Or quite the number of levers at least not yet to fully optimize recovery to the maximum. That being said it shouldn’t be a long distance off the operating costs of Pilgan.
Brian Lynn
And just add to that, David. For FY ’23 Ngungaju contributed about 46,000 tons of product sold. So clearly — and that likely happened in the second half of the year. Clearly our expectation is that we will reach nameplate capacity during the September quarter. So sales are going to be significantly higher than the 40,000 to 46,000 tonnes that was sold during FY ’22.
Unidentified Analyst
Okay, cool. Thank you, Dale and Brian. So I’ve got another quick question on income tax. So based on the latest evaluation on utilize tax loss carryforwards. So, do we have any guidance on the effective tax rate for FY ’23?
Brian Lynn
The effective tax rate going forward is going to be about 30%. The tax rate — the effective tax rate for FY ’22 was I think 22.5% that was driven by being able to recognize those prior tax losses. So, going forward the expectation is it’ll be about 30%
Unidentified Analyst
Okay, cool. Thank you. I’ll pass it on.
Operator
Thank you. Your next question comes from Glyn Lawcock with Barrenjoey. Please go ahead.
Glyn Lawcock
Good morning, Dale. Dale, could you talk a little bit more to the Pilgan offtake, if I look at the June quarter, you probably got around about 6% of the hydroxide price which feels a bit low relative to what some of your peers are pricing. Just could you help me understand when you could next renegotiate that Pilgan Offtake?
Dale Henderson
You know, Glyn, as it relates to Offtake pricing negotiations. We have those provisions in contracts with their Offtake partners. And of course we exercise those when due and ready. And we’ve done in the past and we continue to do that. But there’s probably about as much as I could offer there.
Alex, do you wanted to add there.
Alex Eastwood
Yes, thanks Dale. All our offtakes have price review mechanisms in each one slightly different. But we essentially have the ability to do that on our coordinate half yield [indiscernible]. We look to doing that over the course of this year.
Glyn Lawcock
Okay, I guess I’m just trying to come dialing, so I’m just trying to comprehend like 4 to 4,500 tonnes for your spodumene out of Pilgan, it feels like we’re giving it away relative to what we should be. That’s also just curious, will we see that change? It sounds like later this year or will not be here at all.
Dale Henderson
I think, later would be a good assumption, but as to the gap Offtake versus Spot there that’s not lost on us insuring…
Alex Eastwood
Sorry, they are fixed in, excuse me, volume not prior, so Spot is actually planning they don’t have that [indiscernible] doing well for us, you’ll get such as where those that Spot guys, now as you’re planning for Spot.
Glyn Lawcock
I appreciate they are link to hydroxide, just feels like the current linkage is under selling what you should be getting for it. Can I just switch to the Ngungaju plant then? I think now you said you’d be doing another BMX option next month. When it’s running, it’ll be doing 15,000 tons per month.
Do you envisage putting the full 15,000 on BMX or still holding it at the 5000 and then like how would you sell the other remaining if it doesn’t all go through the BMX, is it going to be against a particular index? I mean, if you sell it against BMI, it feels like you’re giving it away again, if you use that index? Thanks.
Dale Henderson
It’s an open question on where you’re going with in terms of the attractiveness of the Spot market is obviously a good way to go. And although we haven’t made a decision have a good sense to a portion a lot of the product in that direction to realize maximum benefit.
Glyn Lawcock
Okay, thanks.
Operator
Thank you. Your next question comes from Al Harvey with JP Morgan, please go ahead.
Al Harvey
I just wanted to follow-up on Kate’s question before around inventory levels that you’re seeing, are you able to kind of give us any extra color there on where you’re seeing inventory buildup through the supply chain, particularly over there in China?
Dale Henderson
Yes. The insight we have and so I had discussions with customers there isn’t build up to our knowledge. And if anything, there remains idle capacity for conversion. So we don’t have anything — we don’t see anything in terms of inventory to build up from our perspective.
Al Harvey
Thanks, Dale.
Operator
Thank you. Your next question comes from Matthew Frydman with MST Financial. Please go ahead.
Matthew Frydman
Sure, thanks. Morning, Dale and team. I have been having few cold problems, so probably if I did miss some of these questions. But I wanted to ask on exploration, you didn’t really call this out directly in your guidance. But can you give us a sense of your drilling and resource definition budget for FY ’23? And also the expected timing of the next resources update? And is that update likely to be driven by new geological data and drilling data or potentially desktop pits optimization or price and cost assumptions? Or is it going to be both? So, just some context around what that next results are likely to look like? Thanks.
Dale Henderson
Yes, thanks, Matt. We will do the normal reserves uptake later this year. And we will be a part of the reconsidering all of the normal modifying factors, as added process when we do that ore reserve updates. To the question of exploration budget, we have some very modest expenditure in mind for the year ahead. However, we are reconsidering that at this point in time. And we will disclose in due course, but we are considering the activity levels.
Matthew Frydman
Great. In that update later this year. Can you remind us what you’ll can’t — I guess reserve price assumption long run is for spodumene and is that one with modifying factors you’ll be considering?
Dale Henderson
Yes, will be one of the modifying factors will consider, that will be detailed as part of the modifying factors, as we did in the last ore reserve update last year. And we will do that in the upcoming one, as to what level, we haven’t had any determination on that, but historically, we have used the various forecasting agencies as a guide. And historically, we have used benchmark with a guide and historically in the last ores of the guide pricing.
Matthew Frydman
Got it. Thanks, Dale. Second question on BMX options and you touched on the frequency that you expect to be able to achieve with a little bit more product coming through the system. Can you remind us of the current state or the current thinking around the timing of construction and ramp up at Gwangyang and I guess at what point you’ll need to actually start spent sending spodumene over for that?
Sure. So the Gwangyang — the Downstream plant to be constructed at Gwangyang is essentially underway. And the commissioning of the as guided by POSCO is expected to be late next year, potentially early in the year after into ’24 subject to progress. Did I clear, Matt.
Matthew Frydman
No, watching that out. Sorry, late next calendar year?
Dale Henderson
Yes, late next calendar year, would be the earliest.
Matthew Frydman
Yes. And do you expect that will affect your ability or I guess the frequency that you’d like to run BMX auctions out?
Dale Henderson
That will be subject to the timing of the next leg of expansion and where we moved to there we should have some three board a tonne. And then, of course, we’ll be obviously further optimization for the plant. But we expect — the other piece to where it would be around the ramp up timing of that plant of POSCO, they won’t need all of the full tonnage for ramp up right, from commencement, given that there’s a graduated ramp up profile. So the some of those three things are the P680 timing, the POSCO ramp up and further optimization, we’ll walk some through to additional tonnage, which could be made available for the BMX.
Matthew Frydman
Got it. Thanks for that Dale. Maybe just lastly, quickly. And following up on the questions around material movement. Can you give us a sense of how you actually flex those costs down from an owner operator perspective? Once you’ve done the catch up? Or once you’ve moved the waste that you see you need to over FY ’23 and maybe into FY ’24? How do you actually take that cost out of the fleet? Is it from the fleet naturally transitioning from moving more waste to moving more ore? Or do you actually need to actively strike down the numbers in the fleet capacity over time to take that cost back out?
Dale Henderson
Those things will happen for the fleets will always be resized to really match the mine plan in terms of outright equipment and personnel. But we are expecting to over and above to improve productivity through essentially just good practice in mining. And we’re expecting to have some other key benefits from our owner operators mining more continuity and retention of key staff, we’re looking to add some of the very sensible productivity tracking equipment to our fleet et cetera. Or to come on time, which will of course play through to cost reductions. So all of the above to be done.
Matthew Frydman
Great. Thanks, Dale.
Operator
Thank you. There are no further phone questions at this time. I’ll now hand back to Mr. Henderson.
Dale Henderson
Thank you very much for that Melanesian, and we’ll now go to webcast questions, can you start.
Kate Bell
We have had a lot of webcast questions come through the vast majority in regards to dividends, which I think will be more fully covered in capital update later in the year. So one question was, with regards to the loans the company has, are there any restrictions in relation to those loans on the company paying dividends?
Brian Lynn
Yes, so we have secured franc facility with a number of banks. That facility currently does not — and that is the securities held at the project level around the assets at Pilgangoora. And so we actually restricted from paying money from the subsidiary coming through to the parent company, by that facility, until December of this year.
At the end of December, this year, we’ll be able to stream money up into the parent entity and at that point in time, we would therefore have cash about to build and pay dividends. But also we would need to recognize at that point, we haven’t yet paid any tax. So we’d also need to think through what that means, chosen a frank versus an unfrank dividend.
Kate Bell
Thanks, Brian. Matthew James has asked, could you please confirm progress towards carbon neutral status and anticipated timing?
Dale Henderson
Yes, sure. Thanks Matthew. Now we’ve done some work on carbon reduction pathway, which charts that long run path. The key focus in the near term it’s been around getting on with some of the key carbon reduction projects which have helped move the dial, so first cab off the rank there of course, is a 6 megawatt solar which we’re deep into construction of that and in fact, it’s an updated photos and the presentation which went out this morning, showing that that’s well progressed so we’re looking forward to getting that turned on.
The other key project of course is the Midstream project, we think that has provides the material steps down and carbon reduction for the industry. So really tackling those Scope 3 emissions. Those are the two key projects where we’re pouring the majority of efforts into at this time.
Kate Bell
And finally Mark Thompson had asked, is there any news on your replacement as Chief Operating Officer?
Dale Henderson
Thanks, Mark. We are deep into finding a new Dale to replace what role I had. And we are pleased to report, there’s some strong interest in some very competent persons putting their hand up for it. So I think we’re definitely going to get an upgrade from the previous incumbent and looking forward to making that appointment in due course.
Kate Bell
Thanks, Dale. That covers all of the webcast questions. So I’ll hand back to you for the final comments.
Dale Henderson
Great. Thanks, Kate. And thank you to everyone who joined the call on absolute cracking financial results. A very busy year and positive outlook ahead and look forward to updating next quarter. Thank you all for dialing in.
Operator
That does conclude our conference for today. Thank you for participating, you may now disconnect.
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