Pilbara Minerals Ltd (OTCPK:PILBF) Q1 2023 Earnings Conference Call October 24, 2022 8:30 PM ET
Company Participants
Dale Henderson – MD, CEO & Director
Brian Lynn – CFO
Nicholas Read – Read Corporate
Conference Call Participants
Matthew Frydman – MST Financial
Mitch Ryan – Jefferies
Kate McCutcheon – Citigroup
Alistair Harvey – JPMorgan Chase & Co.
Levi Spry – UBS
Glyn Lawcock – Barrenjoey
Operator
Thank you for standing by, and welcome to the Pilbara Minerals September 2022 Quarterly Investor Conference Call and Webcast. [Operator Instructions].
I would now like to hand the conference over to Mr. Dale Henderson, Managing Director and CEO. Please go ahead.
Dale Henderson
Thanks, Darcy, and hello, everyone, and welcome to Pilbara Minerals September activities quarterly call. In terms of the people we got in the room today, we’ve got the usual suspects, with Brian Lynn, our CFO; Alex Eastwood, our Chief Commercial Officer and General Counsel; Brad Milne, our acting COO; Dave Hann, our Investor Relations adviser; Linda Gimondo, our Corporate Affairs and Sustainability Manager; Danielle Webber, our Company Secretary; Nicholas Read from Read Corporate.
So we’ve got the full team here. And in terms of the call today, we’ll go through the normal order of events we’ve done historically. For some opening remarks from me, a slightly more detailed commentary from myself on ops projects, downstream and then I’ll throw to Brian, who will infill on finance and cover off the numbers.
Then back to me for a little bit on the market commentary, and then we’ll move to questions at the end. Before I step into my opening remarks, I just wanted to talk about our great people at Pilbara and offer a couple of comments here because we’ve got a few updates in this regard. The first of which is Brian made the decision that he’s looking to transition out from Pilbara.
So we are underway with that process to find our new Brian. and I won’t be offering too many gushing remarks about Brian because he’s going to be here for a little while yet, at least, another quarter. So we’ll save for the tears of misery, of course, for the next quarterly call. But of course, Brian has been an absolute champion and absolute pillar of the business from the full journey to date.
So an absolutely incredible innings. And we’ll be sad when he ultimately transitions out, but he leaves the business in incredible health. Also in the people category, we made the appointment of Vince De Carolis as the — as our new COO. So we’re delighted that Vince is joining the team, and we had the privilege of some stellar candidates competing for that role.
So Vince will be joining us before the end of the year. And in the same breath, I’d like to acknowledge Brad Milne who’s been our interim COO, who’s been carrying essentially everything in terms of both the operation and building the projects category. So he’s been carrying it all in his stride.
So thank you, Brad, keep up the hard work. We’ll be continuing to load you up as we move forward. So yes, a couple of key updates here around our people.
Okay. So in terms of the quarter, we’ve had a really strong quarter. Pricing continued to improve. Our production really, really going well. Particularly Ngungaju, delighted with how that went for the quarter, big shout out to the ops team.
And costs were at the lower end of guidance. Now all of these things have sum through to a big leap up on the balance sheet by $780-odd million, looking at just shy of $1.4 billion on the balance sheet. So that’s all going well. Projects-wise, on track; downstream, the foot is down. And we’re going as quickly as we can on those fronts with POSCO. And then in the milestone category, we shipped our 1 millionth tonne for the September quarter so that’s pretty neat.
So a really positive quarter and life is good in lithium. So now just stepping into each of the areas. In terms of ops, the vital signs, safety, bit of a low light here. And though we had 2 recordable injuries for the period, however, we did see a slight reduction on our from the prior quarter, moving from 4.4% to 4.2% as a function of the larger hours that we’re burning on site.
Production-wise, a 16% increase from the prior quarter, up 147,000 tonnes, which equates to a run rate of about 588,000 tonnes. So we are really delighted with that production performance. Things are going well. Sales, 138,000 tonnes, slightly up from the prior quarter as well.
Cost at the low end of guidance, and Brian will offer a bit more commentary in this regard later on. And product grades, as we flagged in prior quarters, we’ve started to edge down a little low on the product grade for the purposes of maximizing yield and delivering more lithia units to market. So that’s what we did for the September quarter, 5.3% lithium product at the gate.
And yes, mining. Continued picking up in the mining movement, about 9% increase from the prior quarter, slightly under where we wanted to be. Some impacts of COVID still, particularly at the start of the quarter, not so much at the end of the quarter, but the start of the quarter was impacted a little bit on the mining movements.
And we also noted that we’ve continued tapering up of our owner miner fleet now scaling back on MACA. We still have MACA in the wings, but by proportion, it’s quite a small component of the mining fleet. Moving to processing. Recovery on plan for sort of mid to low 70s, happy with how that’s going. And is to Ngungaju, recovery has been in sort of the mid-60s, so going well and happy with that.
And lastly, in the office world pricing. We have pricing reviews underway. No updates that we can really offer at this point, but I can assure you all that those processes are well underway and looking to progress those within the quarter we’re in. And moving from ops to projects. The P680 project well underway. There’s a photo in quarterly of the earthworks. So good to get the graders out and get underway with that.
And as it relates to the P1000, that step up to 1 million tonnes per annum, we’re on track to get the FID put to the board this quarter. Moving from projects to downstream. The hydroxide joint venture plant we have with our friends, POSCO from South Korea, they are underway, awarding long lead items. Early works have commenced on site and are looking forward to getting over there in the coming weeks to kick the tires and see how we’re going there.
As it relates to midstream. The joint venture docks are vastly matured and getting close to the finish line on that so that’s good. In parallel with that, the requisite studies continue at full force. As to FID for that downstream plant, looking like that will be in the March quarter. I’ve had a little bit of a delay on that one. So doing everything we can to obviously accelerate that project as much as we can though. Okay. So that offers a bit of a rapid fire run-through on ops projects and downstream. And at this point, I’ll hand over to Brian for an update.
Brian Lynn
All right. Thanks. Thanks, Dale, and good morning, everyone. Three months ago, I described the June quarter as transformational for the business. Well, how I described the September quarter is a satisfying quarter and that we beat nearly all key metrics as they compare to June.
So if I think through the business, we had a 16% improvement in the tonnes produced. We had an increase in the number of tonnes that we shipped. We had an improved realized pricing outcome compared to June. The weaker Australian dollar actually also helped us realize a higher AUD realized price. And we achieved a lower operating cost. And as Dale said, that was towards the bottom end of the guidance.
So overall, when you look back at the quarter, I think that’s a very satisfying quarter that we’re able to continue to improve the key metrics for the business. The positive pricing environment and stronger operational performance helped us deliver a really healthy operating margin. So we had an operating margin of just shy of $740 million.
And this resulted in our cash balance being nearly $784 million better and stood at $1.375 billion at the end of the quarter. In the past, we’ve also included the irrevocable letters of credit. If we include those as well, the balance is $1.5 billion, which is a $634 million increase compared to June.
We ended the quarter with a net cash position so net of secured debt of $1.2 billion. And that clearly now supports a very, very strong balance sheet. Given the strong increase in the company’s cash position, which has really happened over the last 6 or so months, the company is now turning its mind and working on establishing a capital management framework, which will include our dividend policy, and we hope to be releasing that to the market during the December quarter.
Just turning to some commentary on selling price and operating margins. So the strong market conditions, obviously, continued during the September quarter. And this really supported the company’s ability to continue to deliver more lithia units into the market through the reduction in the product rate of 5.3%.
So we sold — just over 138,000 tonnes of spodumene concentrate. And we realized a price of USD 4,266 per dry metric tonnes on an SC5.3 basis, which on an SC6 basis was just over USD 4,800 a tonne, which this represents about a 9% improvement in what we were able to achieve for the June quarter.
Now the average realized price in Australian dollars was actually further bolstered as a result of the depreciation in the Australian dollar compared to the U.S. dollar. So the exchange — the average exchange rate for the quarter was AUD 58.36 and likewise, the June quarter was 0.7146 . We achieved a strong operating margin on a per tonne basis. So that was about just over $5,000 a tonne for the spodumene that we sold, and that’s basically contributed an operating margin of $712 million.
Now we also took advantage of market conditions, and we’re able to sell product, which we call a product. So we sold about 45,000 tonnes of that and achieved a margin of just over $25 million for that product.
So the combined Pilgangoora operation generated a total operating margin of $738 million for the quarter, which is a great result. Just turning to unit operating costs. So the combined Pilgangoora operation, so that both Pilgan and Ngungaju delivered a net operating costs, excluding freight and royalties, of AUD 635 a tonne. And this is at the low end of the guidance that we put out so which had a range of $635 to $700 per tonne. So that was a very pleasing result.
Including freight and royalties, the costs were, in Australian dollar terms, AUD 1,122 per tonne. Freight costs remained elevated during the quarter, but were — did come down side compared to the June quarter. So the June quarter, we averaged about USD 76 a tonne.
The average for the September quarter was just shy of USD 60 a tonne. But royalty costs were higher on a per tonne basis, and that was purely attributable to the fact that we’re achieving a higher selling price. When you achieved a higher selling price, you pay higher royalties to the government. In terms of costs, just some general commentary, I think it’s fair to say that the cost pressures that we noted in the June quarter certainly remained but I don’t think they got worse.
So my take on it is that I think we’ve probably seen the worst of the cost pressures. However, costs still remain elevated. There’s still labor shortages. There’s still some impacts of COVID-19. There’s still supply chain disruptions in just general inflationary pressures that are still being experienced by the business. Turning to our cash position now.
As mentioned, our cash position at the end of the quarter was $1.375 billion. So that’s about a $784 million increase compared to the June quarter. So the major movements in the cash balance. So from the actual cash operating margin from the Pilgangoora was $874 million. So this also includes cash receipts from the June quarter due to a reduction, I guess, in the outstanding letters of credit between the September and June quarter. So some of the cash related to the June quarter, LCs, obviously, came into the bank account during the September quarter.
We spent about $55 million in capital. So that was largely in relation to waste mine developments as well as monies we also spent on the T680 project, the solar farm and also retailing management facilities. About $11 million was paid out under the syndicated facility agreement. So we made our first scheduled debt repayment, which was USD 5 million, during the quarter. And obviously, there’s also an interest component there as well. The lease payments were about $10 million And then our corporate and administration costs amounted to about $8 million. So a cash increase of $784 million with a closing cash balance of $1.375 billion.
If we take into account the debt that we have on the balance sheet, which is in Australian dollars terms, about AUD 160 million. We ended the quarter in a very healthy net cash position of $1.2 billion. So in summary, I think, as I said, a very satisfying quarter. I think it’s great that we built on what we achieved for the June quarter, and we’re in the quarter in [indiscernible] health. That’s everything I wanted to go through. So I might hand back to Dale now. Over to you, Dale.
Dale Henderson
Thanks, Brian. Satisfying indeed. In terms of market commentary, yes, that’s been a really strong market through the September quarter. We’ve seen appreciation in pricing essentially from all indicators. So the comments I’ll offer here are some macro ones and then some micro sort of comments as in the observation closer to home.
So in terms of the outward looking, your pricing has been on the up. I note that the latest update coming out last night shows essentially appreciation across all chemical price points, both Chinese domestic and international. So we’re seeing some really solid levels and in some cases, some new hires.
And of course, outside of that, there still seems to be plenty of activity through the supply chain, whether that’s OEMs, battery makers, cathode makers, all moving forward with their plans. So very, very positive. In terms of the observations closer to home. Well, obviously, the strongest indicator for us is it has been the spot market sales that we’ve been having.
So through the September quarter, we saw, obviously, 3 sales starting in July around $5,200 for SC5.5. By mid-September, that third sale was just shy of USD 7,000 at SC5.5. Now stepping into our latest 2 transactions, which occurred in the December quarter. We’ve seen that step up to, as recent as yesterday, $7,200 in an SC5.5, which scaling that up to SC6 plus rate is around the $8,000 mark.
So moving from July to October over that 3-month period, we’ve seen essentially 17% increase in that spot sale pricing. So yes, very strong appreciation in pricing. As to customer inquiry, they continue to try and beat down the door, the phone won’t stop ringing. Yes, my phone is set to silent.
And it’s just a function of the great market we’re in a long way that continue. So as to the outlook, look, we don’t see anything, which gives us cause for concern in the short term. As to the midterm of absolutely new suppliers coming. We all know that.
But based on our analysis, we’re not too concerned as we look at both the combination of increased supply plus increased demand. Longer term, beyond that, of course, it gets much harder to predict. But Pilbara is feeling very positive where we are given the quarter we’ve just had and the growth profile. So that completes my market commentary.
So to wrap up, a strong quarter across the board, pricing, production and cost at the lower end of guidance. Projects on track, downstream under our way, strong lithium market, it’s all looking very positive. So a big thank you to our Pilbara supporters, our shareholders, in particular, those shareholders who have hung in there for the long term. Thank you, and I hope you’re enjoying the ride. And at this point, look, I’d like to welcome questions, and I’ll pass back to Darcy.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Matthew Frydman from MST Financial.
Matthew Frydman
Sure. And I was going to ask my first question on probably the one thing that you’ve called out as a negative during the quarter, which was the rate of material movement and waste stripping currently running at about 32 million tonnes per annum. Just wondering, in your view, where do you need to get to sustain the rate for the piece of that? When do you expect to get there considering that you’re demobilizing MACA over the current quarter?
And then if we look further forward in P1000, you’ve got that ability with the contractor over the next couple of months. Is there any desire or any ability to keep some additional equipment on site longer in order to derisk the mining rates that might be required for P1000?
Dale Henderson
Yes, sure. Thanks, Matthew. In terms of the waste strip ratio. Look, we will look to increase that modestly from where we were but it won’t be — it’s nothing astronomical. It doesn’t give us cause for concern. As to the long run waste strip ratio, we’ll provide some guidance around that most likely as part of our P1000 FID. And one of the things which is worth noting is we’ve got plenty of options as it relates to mining.
We’re in the process of opening up Eastern pit. So we’ll have essentially 4 different pits to draw from. So depending what the operations team wants to do as it relates to the combination of mine volume versus ore grade — was actually quite a few options available to us now. So with that, the mine team are working through quite a large number of scenarios to work through what’s optimal for returns for the business. So really, the takeaway here is that — if we were to have a volume movement issue, it doesn’t give us cause for concern because there’s other places we can go. And — yes, it’s in good health. Thanks, Matthew.
Matthew Frydman
No, that’s great that you’re building that optionality into the schedules. So I think that maybe while we’re on the point of that, your grade has been tracking quite well from a mine grade perspective above reserve grade, 1.45% during the quarter. Can you give us a view on what’s driving that? Is that down to better mining practices, I guess, versus the dilution assumptions in our middle is a matter of sequencing and timing? Just wondering your thoughts on that and how we might expect that going forward.
Dale Henderson
So Matt, just to confirm, was that in relation to pit grade?
Matthew Frydman
Ex pit grade, if I — I’m looking at the numbers correctly, it’s is running at 1.45% versus your reserve grade, which I think is close to the 1.2%.
Dale Henderson
Yes. Yes, correct. Yes. No, got it. So the — yes, head grade coming from the mine has been slightly elevated to in comparison to life of mine head grades. And that’s always been the case in terms of long-term strategic mine plant just as a function of how the ore body presents. So we see those higher head grades for probably another year to 2 years subject to the latest rev of the strategic plan. Yes. So that’s probably [indiscernible].
Matthew Frydman
Great. Comes down to sequencing. Great. Maybe just closing. Finally, a quick one. Just the rate of CapEx spend during the quarter, particularly the projects, you’re guiding to $250 million of project spend in FY ’23, but it looks like at most, you spent maybe 10% of that during the quarter. Is that down to timing, long lead items that you’ve ordered but not necessarily paid for? But you’re expecting delivery over the course of the year or work is completed? How should we think about that spend rate relative to the guidance?
Brian Lynn
Yes. Matthew, maybe it’s Brian. Maybe I can answer that one, yes. Look, I think it’s largely timing. So certainly on the P680, we’re obviously making commitments. But in terms of how much we’ve actually had to spend is quite low because of long lead items. So the cash burn hasn’t really started yet. So that’s definitely one item, which is the timing.
The other one is, I think you made reference to the fact that we are slightly behind on the material that we’re moving. So we have capitalized less onto the balance sheet for some of the waste being required to be moved. Expectation is that we will catch up on some of that, but probably not all of it. But I think in terms of the total guidance number, I don’t think at this stage, we think we need to vary. It’s going to be sort of at the margin.
Operator
Your next question comes from Mitch Ryan Jefferies.
Mitch Ryan
My first question just starts with which we had some pricing negotiations that are ongoing. Obviously, you’re trying to move those to the perfect [indiscernible] the spot rate but I guess what are the quid pro quos that you have to give as part of the negotiation? Do you have to extend the terms or are there other tend conditions that are being amended?
Dale Henderson
No, Mitch. As it relates to price reviews there. they’re contemplated in those agreements. So it’s just a case of stepping through the motions. So Pilbara won’t find itself in a compromised position. Alex, do you have anything you want to add on that one or?
Brian Lynn
Thanks, Dale. No. So really, the offtake agreements provide for pricing review mechanisms and those price mechanism are intended to ensure that the price is aligned with the prevailing market price for spodumene. So it’s really just a beta process you go through. And it just takes time and half way through that process at the moment.
Mitch Ryan
Yes. And my second question relates to webinar. I guess you called out a very minor increase in cost as you had to pay some bonuses to improve retention or have stuff attention. Can you provide any color on sort of workforce turnover that you’re seeing? And are there any still additional spots? Or do you think you’ve got a full roster as it currently stands?
Dale Henderson
Yes. turnover has been pretty good, Mitch. As it relates to gaps in the workforce, we’re in good order. And we’re in good health in that regard. As we look outwards to the growing operation, we are sensitive around the need to continue to grow the team. So we are taking proactive measures to make sure that we do everything we can to set ourselves up for success.
So what that looks like is we’ve got cultural surveys underway. We’ve got programs around deploying for more training and we are doing some advertising as well just to make sure the Pilbara name is out there and known to market. So all of the above should make sure that the good health around turnover and low sort of gaps in the workforce continues.
Operator
Your next question comes from Kate McCutcheon from Citi.
Kate McCutcheon
Ken and Brian, you added more cash than [indiscernible] coverage this quarter, so well done. Some of your peers are looking to capture chemicals pricing margins, tolling, et cetera. Can you talk through your rationale here for selling spodumene as spodumene per se? And look, I know you’ve got post coming online and you’ve got price discovery through BMX. Are the offtakes at Pilbara linked to reserves? Or is there [indiscernible] to evaluate some of that downstream margin uplift?
Dale Henderson
Yes. Thanks, Kate. Yes. Look sorry for the gold, guys. But back in 2019, the shoe was on the other foot, so the [indiscernible] commodities . As it relates to your question around our sort of strategy, we took the view of the highest order method to create maximum value for shareholders is through integration and chemicals participation. And relationship with POSCO through their joint venture is really our first foray into that space.
But of course, where we are today is very much a spodumene concentrate provider. So I think there is some transitional options, which include what we’ve been doing in the way of BMX sales, but also tolling as you mentioned is a viable avenue in this market. And of course, we’re well aware that others are deploying that. And Pilbara is considering that as an option.
But we see those as transitionary methods, ultimately, moving towards that aim of deeper integration. So over time, I think what we’ll see Pilbara is to migrate in that direction to becoming more of an integrated producer. I believe things don’t happen overnight. In the case of the POSCO joint venture that was first kicked off in early 2018. So these things do take a bit of time. But hopefully, that fills in the picture, Kate?
Kate McCutcheon
Yes. And hypothetically, would your offtakes allow you to hold any volumes attached to Pilgan?
Dale Henderson
Well, we can’t get into the specific of offtakes. And we do have that, obviously, spread of offtakes. Some of which are coming up for expiry, which, of course, provides optionality for Pilbara.
Kate McCutcheon
Okay. And the lowered rate, what’s the feedback from your customers being on that? Does it need to be blended? Interested in any comments around that?
Dale Henderson
Yes. We, of course — as we’ve made these deliberate changes engaged with our customers and to make sure that the product is acceptable and works for them. It’s not a case of them needing to blend up the product or change it in any way. That is the case. The chemical customers, if they had a magic wand, they would only receive the absolute highest grade product that makes their life slightly more easier and slightly reduces their costs. But there’s certainly no issues with the grade we’ve been producing for our customers.
Kate McCutcheon
Okay. And then finally, P1000 FID, should we be expecting that this quarter? Or what’s the timing on that?
Dale Henderson
Yes. Yes, this quarter.
Operator
Your next question comes from Al Harvey from JPMorgan.
Alistair Harvey
Yes. Just a couple from me. First off, just with the trend down in the concentrate grades down to 5.3%, just trying to get a feel for where that will balance out long term. And then I guess following on from that, does Pilgangoora do 1 million tonnes per annum at those lower grades? Or can you get a bit of a volume uplift from those better recoveries?
Dale Henderson
Yes, Good day, Al. A good question. As to the long-term strategy around product grade, that’s an open question. The ability we have through the operation is to vary product grade up and down as a function of customer requirements in the current market, where the market is screaming for every lithium unit possible.
We have, of course, gone on taking those steps to maximize those lithium units through dropping the grade. So that makes good sense in the current market. Will it always be that way? Obviously, we don’t know. But if we do need to vary that grade — product grade up, we can. That’s just first to your first question.
To your second question around the sizing of the P1000 on 1 million tonnes per annum. That is sized on an SC6 product grade. So you are correct and where you’re going there around is there upside based on slightly lower product growth. The answer is yes.
Alistair Harvey
Great. Maybe just even thinking beyond that, I know you guys used to talk about or you scoped up the what you used to call the Stage 3, which would have taken Pilgangoora to 1.2 million tonnes. So that’s an overdue of 1.4. Beyond the P1000, do you think another expansion like that comes into play? Or is it a bit early to comment?
Dale Henderson
Yes, it’s a bit early to comment on that one, Al. But as to the exploring that concept, yes, we’ve definitely been turning our mind through that. As you know, we’ve got incredibly huge natural resource there, further and large all throughout the Altura acquisition.
And the more we drill, the more we find. So — yes. I think in the full course of time, we’ll look to go larger, but we need to do the work to support that decision, the drilling, the more scoping studies, et cetera. But we like the idea of going larger.
Alistair Harvey
Dale, and maybe just this final one on the Calix JV. So looking for — was it FID March next year? Just wanted to get a sense of how you guys are thinking about the market for lithium phosphate salts. I noticed in Calix’s recent presentation, they thought it might get priced around 85% of the lithium carbonate number. I’m just wondering if there was any signs around that or is just a share of lithium pop equivalent?
Dale Henderson
Yes, sure. So the FID is for the demo plant, just to clarify, would be March quarter. So depending how we go like that to be in the early part of the quarter versus March. As to the product appetite and pricing, we are engaging with buyers at the moment with some samples, so that will be quite important in the way that, that guides us, both around the process design, as it relates to product quality, plus pricing. As to the indicative numbers, Calix has provided you, you’ll have to chat to them about that one.
Operator
The next question comes from Levi Spry from UBS.
Levi Spry
Maybe a question tying in a few of those last ones. So the update on the capital management policy, including prospects of a dividend. Can you talk us through some of the considerations there that might be going into fleshing that out a little bit? And maybe Brian can just close in on the implications for franking as well?
Dale Henderson
Yes. Sure, Levi. I’ll keep at the party line here and that we’ll get this one done before Christmas. But we are trying to get it out the door as soon as we can because — that’s not lost on us, but the returns are going well and the market is looking for guidance as to our capital management policy. So yes, we’re working as quickly as we can to form our view and we’ll get that out the door as soon as we can. And Brian?
Brian Lynn
Yes. Yes, Levi, obviously, we’re generating a fair bit of cash and expectation is pricing is going to stay strong. So therefore, yes, we would expect that cash flow to continue. So it is fairly important that we find a good balance between what we return to shareholders, but also what we try and use to grow the [indiscernible].
So clearly, we’ve got a couple of things coming up. We’ve got P1000, and we’ve got the demo plant. So we need to think about how we’re going to fund those. We need to give some thoughts in terms of whether there are other sort of growth opportunities out there. So — and what we might need to retain in terms of cash to allow us to have the best opportunity to do the best job for shareholders.
So we’re sort of considering all of those things at the moment. But in terms of the timing of the dividend here, franking credits won’t be generated until we start paying tax. We start paying tax in February next year. So that’s sort of — it’s hard to see us paying if we’re going to pay a dividend before June. It seems to me to be — and obviously, it was tied in with the full year results that we announced in June or in July and August.
And then the other thing, just to be aware of the existing debt facility that we have is that we are slightly restricted on when we can pay dividends there as well. However, that restriction gets lifted at the end of December. So that sort of goes away. So — yes, to answer, yes, we’re sort of working on this fairly quickly. It’s a question that gets raised by a lot of interested parties. So I think it’s something that we do need to give some color on. So we’re trying — we will try and get that out as soon as we can.
Levi Spry
Excellent. And just another question on, I guess, price implications. Is there any prospect of recutting your mine plans and your reserves at a considerably higher price in the short to medium term? And what point would be the implications to that? Would it be 1.2 million tonnes per annum plant?
Dale Henderson
Yes. Good question, Levi. We haven’t gone there yet, but we are wrestling with that question. As you expect, if your long-run pricing is much higher, does materially change on how you think about the reserve. But at this stage, we haven’t ventured in that direction yet. And I think it’s important to note that it’s pretty obvious that there is a wide variation and opinions on what is the long-run pricing for the market.
Levi Spry
When you work it out, let me know. Yes.
Dale Henderson
Will do. Likewise.
Operator
Your next question comes from Glyn Lawcock from Barrenjoey.
Glyn Lawcock
Dale, just wondering if you could help me understand the production side rather than the sales side. So what was the product grade produced in the quarter just gone to get the volume?
Dale Henderson
5.3.
Glyn Lawcock
So in line with the sales product?
Dale Henderson
Yes.
Glyn Lawcock
So if I look at — is that as low as you plan to take it then, do you think? I’m just trying to reconcile what feels like lower grade now with an unchanged production guidance for the year of $540 million to $580 million when the September quarter was annualizing just over $580 million. So if you hold this grade or drop it lower, or I’m just trying to understand what was the guidance based on that.
Dale Henderson
So to the first part about where do we take product grade ultimately, and will we go lower. That’s — we haven’t made a decision on that. And obviously, we continue to engage closely with our customers on that one. But as you’d expect, we’re commercially driven to lower that grade, but on the limits customer can accept. So the trend continues to be down. And obviously, we’re obviously observing what competitors are doing in this space. As to the prior guidance for product grade. I think we had that on a five point…
Brian Lynn
5.3 — it was a range, and the range was to sort of recognize that the potential product grade of between 5.4 to 5.7.
Glyn Lawcock
Okay. So the base of the top of the range is almost where you’re producing at now? Okay. Can I just now ask a little bit on — I know you’re still in the midst of negotiations on your offtake. But just trying to understand, are you trying to get off the linkage for hydroxide, can you actually make that bigger change?
Or is it just changing the percentage? Because I understand most of the Pilgan plant actually goes out a percent of hydroxide rather than a link to like an index on spodumene. So are you trying to change the actual terms or just the percentage of the hydroxide link?
Dale Henderson
Yes, the specifics around that really depend on the offtake agreement and question and the customer question. So I can’t really get into that, but it’s fair to say all variables can be revisited.
Glyn Lawcock
Okay. But it’s unlikely to impact the December quarter we’re in. So when could this take effect from, assuming you get a favorable outcome in — towards what you want?
Dale Henderson
Yes, you’re right, Glyn, it’s likely more flowing through into the March quarter results. But the other thing to add here is that, based on, obviously, the market movement we’ve had, we’ve — I wouldn’t be surprised that there’s more reviews in March quarter, the way things have been going. It’s been a potential movement as a function of the market moving.
Glyn Lawcock
Okay. And then just looking at Ngungaju, I mean, obviously, you told us you only did 87% into legacy/offtake agreements. Now that you’re doing — like you’ve done 2 options in 2 weeks, 3 options a month is pretty much the capacity of the Ngungaju complex. Is that suggesting now that looking forward, at least, the Ngungaju tonnes are all going to be going out at either BMX price or an index now?
Dale Henderson
We do have some — we do still have some legacy contracts to fill, Glyn, which will be finished up before the end of this quarter — December quarter. So from January onwards, that’s sort of 200,000 tonnes from Ngungaju basically, unencumbered, and available for sales pathways such that Pilbara Minerals team is appropriate.
Glyn Lawcock
So is — your best guide is if you do an auction, that’s a spot every other tonne that you produced and sold this quarter is going out into legacy?
Dale Henderson
Sorry, say that again?
Glyn Lawcock
Sorry. So if I look at your options this quarter, is the best guide to sort of say all your auctions are the spot tonnes and every other tonne produced this quarter is going out into legacy?
Dale Henderson
We haven’t guided what proportion of — for this quarter will go to the spot market. But needless to say, some of — we do have some legacy contracts to fulfill. So the Ngungaju tonnes, for example, for December quarter aren’t all going to spot. That’s as much as I can guide you on. .
Glyn Lawcock
Okay. That’s great. And if I could just squeeze one last one in. Well done on the costs. Is that something we should expect to continue then if you hold this volume? Or was there something you capitalized a few more costs in the quarter, if I look at the rest of the year?
Dale Henderson
Yes, we’re not looking to revisit guidance yet. As it relates to costs, we’ll see how this quarter goes.
Brian Lynn
Yes, Glyn, it’s Brian. Look, we didn’t — we certainly didn’t capitalize additional cost and, therefore, we’ve got a lower cost. I think generally, your lower cost is a function of the Ngungaju plants coming on and actually probably performing better than we anticipated for this quarter.
And clearly, that sort of slight drop in product grade actually obviously helps your unit costs as well. So I wouldn’t expect costs to go up. I’m quite confident that we’ll manage to get a slightly better cost performance going ahead. But we’re not ready to sort of make that decision yet. We just want to see how things go over the next quarter or so just to understand those costs that we’re fairly comfortable with how it’s performing on a cost base.
Operator
Your next question comes Ben Lyons from [indiscernible].
Unidentified Analyst
Yes. Dale and Brian, massive quarter guys, well done. That said, I know you continue to call out your being a bit below your overall aspirations. But looking at the stats over the past 2 quarters, you’ve still mined about 1 million tonnes more ore than you’ve actually processed. So that’s sitting on the bond ballet, call it, 1.45% at the moment.
So a two-part question. Firstly, how much ore do you want sitting on the pad to give you maximum comfort ahead of the plant expansions coming in? And then secondly, obviously, there’s a clear market for low lithia products at the moment or off-spec products.
The middlings product that you sold during the quarter was lower grade than your executed mine grade. So I guess the second part of the question is, once you’ve got comfort on the ROM pad, and I acknowledge that the overall strategy of the business is to pursue further integration. But clearly, the market can’t be this strong forever. So would you consider putting some DSO into the market once you’ve got sufficient or seeing on the ROM pad?
Dale Henderson
Yes. Thanks, Ben. Yes, as it relates to ROM, yes, we’ve definitely been building that out, for a couple of reasons. One, it’s good to have those stocks available. But the other point is as it relates to blending strategies depending on the sequencing from the mine — there is times when different grade bins are acquired. So that sort of falls into the volume movement.
As it relates to our appetite to do DSO or other types of low-grade products. We wouldn’t rule it out, but it’s unlikely given the essentially the margin on the logistics efforts involved. It’s the lowest order of value creation. So — and then the market where everyone has to work hard to refine, build labor and the equipment acquired approvals required port logistics, there’s a lot involved to take that undertaking.
In contrast, we’re far more focused on accelerating our expansion. The sooner we can do that, the sooner we can bring forward higher-grade tonnes and potentially tonnes, which can be diverted onto the BMX or other channels, which realized a strong margin.
Operator
There are no further phone questions at this time. I’ll now hand over to Nicholas Read for webcast questions.
Nicholas Read
Thanks, Darcy. Hi, everyone. We’ve got over 160 people on the webcast and lots of questions. I’ll rip through them as quickly as we can. I’ll just skip over the dividend question. There’s a lot of them here, but I think that’s been adequately dealt with.
So the first question here is from Robert Congdon. It’s a 2-part question. He says, “How long do you think before you will ramp up to 1 million tonnes per annum?” And the second part is, “Can you sell more tonnes by the BMX market?”
Dale Henderson
Yes. Thanks, Robert. As to the timing for the ramp up of the P1000, we haven’t guided on that, but that guidance will come as part of the FID decision, which should be this quarter. So we’ll provide that guidance there. But if I was to guess, I think it will take approximately 18 months from FID approximately.
But as I say, we’ll give some guidance [indiscernible] decision. So the second part, BMX, yes, as it relates to available tonnes, BMX is a pathway that we can use. But as to earlier in the — questions earlier, we did talk about other avenues such as tolling. That’s a possibility as well, which Cooper is considering.
Nicholas Read
Thanks, Dale. Next question from Doug Brasier, “Is the crusher, sorter owned by the company now in operation?”
Dale Henderson
The new integrated crushing or sorter will be owned by and operated by the company. It’s not here yet. It’s under design and so it will take a little while to get that one delivered and built and operational. We’ve guided that we’ll be ramping that up in the quarter next year.
Nicholas Read
The next question is from John Bishop. He says, “The 1.2% material sold equates to USD 2,500 on an SC6 basis. Can you please outline where this material is otherwise penalized, i.e., the pro rata relationship between grade and benchmark price does not hold for this material?”
Dale Henderson
Yes, John. This one is a difficult one to answer and that there’s no real market out there in terms of this type of product. It’s not a case of having specific [indiscernible] for mineral type or that type of thing. This was a sale to a specific customer. It was a negotiated outcome. That’s as complex as it gets, that one.
Nicholas Read
Thanks, Dale. Quick one for Brian from [indiscernible]. “Has income tax being paid in the quarter? Thank you.” Can you answer that?
Brian Lynn
Yes. Yes. Thanks for the question. Look, no, income tax has not yet paid. So the tax to be paid for the FY ’22 year is made in February next year, and then we fall into what is essentially a monthly installment tax payment after that.
Nicholas Read
Thanks, Brian. The next one from . “How will production from the Ngungaju plant be sold?””
Dale Henderson
Good question, and that’s an open question. But amongst the avenues, BMX, tolling or working with their existing customers.
Nicholas Read
Thanks, Dave. Next question from Derek Free. He says, “Contract pricing seems to be only increasing very slowly, especially compared to BMX. When do you see this improving in the light of the very high spot prices currently being seen?”
Dale Henderson
Sure. I think your — and the gap is not on us, and we were working through addressing that through the price review process that we have underway and we have details in the quarterly. And as those resets occur, that will then flow through into subsequent quarters.
Nicholas Read
Next question is from Scott Anderson. He says, “What is the expected cost reduction that will be realized once the 6-megawatt solar plant is commissioned?”
Dale Henderson
Yes. Good question, Scott. And I can’t remember off the top of my head. I wish I can answer it . But we don’t have that one to hand, but it does provide a cost production. And we like the idea of continuing to expand off that as those years to come.
Nicholas Read
Okay. A related one from Craig Morris, “Following successful completion of the current solar installation, are there plans to expand solar array and/or look at energy storage? And are there any plans for the electrification or otherwise of the mining fleet?”
Dale Henderson
Yes. Thanks, Craig. So at the high level, absolutely, we have a long-range strategy to drive carbon energy down and out from our operation is as everyone further relates to increased solar and other renewable harvesting methods. Yes, we’ll continue to do that in the years to come.
But to that extent, batteries, we like the idea of that, but we need to do the work to understand if and when we deploy that. But into the mine electrification and , as his own time frees up that’s going to be one to consider. And — yes, we watch with interest the developments by other mining companies in that space.
Nicholas Read
Thanks, Dale. A tricky one here for Brian from John Tan. He said he’s put the numbers into his spreadsheet and here we seems to be heading for a full year EPS of better than $0.90, barring unforeseen circumstances. Is this number wildly optimistic?
Brian Lynn
John, we don’t tend to put guidance out at that level. We’ve obviously guided on production numbers and cost numbers and really is up to the investment community to make up its our mind as to what that means from a profitability point of view. So it’s not something that we tend guide on.
Nicholas Read
Thanks, Brian. The next one is from Joshua [indiscernible]. He says, “If the strategy continues to drop product grade, whereas the commensurate lift in volume guidance? Otherwise, no offset on lower price could incline issue with delivering an SC6 product and recoveries.”
Dale Henderson
Yes. The commensurate yield uplift, Joshua, as a function of the mineralogy, virtual function of the mine plant, so that does vary. And we will provide more guidance in this in time, if the yield benefits for the lower product grade.
Nicholas Read
Thanks, Dale. I’ve got a long one here from Robert Park. He’s asked, “How are you thinking about financial risk and opportunity from here given you have such a rapidly expanding balance sheet. Is the opportunity risk of projects such as the midstream project more attractive to consume with your reduced financial risks and changing opportunity environment, including market factors, such as the Inflation Reduction Act? Is your intention for a 3,000 tonne per annum lithium salts ambitious enough? And do you have any immediate plans to expand this beyond the flotation i.e., process additional product?
Dale Henderson
Sure. Good question, Robert. The way we think about midstream is everything which has occurred with midstream today has been very positive in terms of scoping studies, test with, et cetera. But what we haven’t done yet is test the concept at scale. And as with any R&D project, you can have scale issues.
So the way we think about it is the best thing we can do is to accelerate the delivery of that demonstration plant such that we can iron out — learn and iron out any learnings that might flow from that and validate the technology at scale and validate unit cost plus you’re producing a product that we can really test the market. The appetite to skip that step is really isn’t there because that would — look, I think that represents both risks and that there might be some learning foot we’re not aware of.
And also it might prevent us from the opportunity of doing a more optimized design at scale. So as I said, the best thing we can do is to accelerate that demonstration plan, step through those learnings and then we can turn our mind to go into scale.
Nicholas Read
Thanks, Dale. Next question from Anthony Barich of S&P. He says, “Other lithium producers have noted the continuing supply chain prices, mainly shipping, impacting both the transport of products and materials to build new projects. Are you also seeing these impacts?”
Dale Henderson
Yes. Yes, there’s definitely been long lead items becoming longer lead items, unfortunately. So Pilbara is not immune to that. We, of course — we’re aware of that. So as we have contemplated P680 and P1000, we’ve been getting on with getting orders done as rapidly as we can to mitigate those risks. But here, we are seeing supply chain challenges globally as are others.
Nicholas Read
Thanks, Dale. And just on a sort of related issue, David Neenan asks, “As capacity ramps up, are there dispatch or shipping bottlenecks ahead leading seasonal weather?”
Dale Henderson
Yes. David, every wet season presents some challenges. Here, we’re heading into the cyclone season. But we have mitigations, which help and that we have some — we have additional storage at what we call our Wedgefield storage facility, which is adjacent to Port Hedland.
So we use that as an inventory holding area that helps. But when pipelines come through, they do cause specific instances of product moisture requirements, that type of thing. But as I say, we have — we built the buffer into the system to mitigate that out.
Nicholas Read
Okay. Thanks, Dale. The next question we go, says, “Well done except with contract prices. I don’t understand your underperformance in this area versus peers. Can you please give us a color?”
Dale Henderson
Thank you. Look, it’s in the hands of the price review process. And like I just remind everyone that pricing that’s appreciated very, very rapidly. I mentioned earlier in the call about 1/3 — 17% less than spot pricing. So we’ve seen quite rapid escalation. As to the price review process has progressed as rapidly as it can, as provided for within those contracts.
So probably key point. The other key point is to say that we know that we’ve done a round of price reviews some time back and until I was applauded because we were ahead of our counterparts are subsequently revisited. Now we’re behind that. We’re not being . And the merry go round will probably continue as we work in lockstep to chase the market price.
Nicholas Read
Thanks, Dale. And the last question here from Adrian Corbel. Apart from congratulating everyone on a great quarter he says, “What is the expectation for frequency of sales and tonnage on the BMX platform now that the Ngungaju plant is at capacity.”
Dale Henderson
Yes. In terms of available tonnage for alternative pathway to market from sort of January onwards, the Ngungaju [indiscernible] essentially spoken for, so approximately 200,000 tonnes. As to what proportion of that gets to be BMXs is — we’ve not guided around that. And we are keeping our options open as it relates to BMX so working with customers.
Nicholas Read
Thanks, Dale. Sorry, one last one that’s snuck in here, from . “Can we confirm that Pilgan has been producing at 5.3%, or is there a mix between Pilgan and Ngungaju? If a mix, what grade is Ngungaju producing at?”
Dale Henderson
Sure. Shannon, the way we think about the operation is we’ve got 1 operation and 2 processing plants. So the price facilities are used to produced product to meet the spec. As to what product grade does each plant produce, that’s actually a function of optimizing recovery for a particular mineralogy, which is a function of what comes from the mine.
So that varies over time. And each of the clients have different strengths. Part of the operating teams’ challenges and what they work on is optimizing the strength of those respective plants as a function of the different mineral properties coming from the ore body. So it’s not some account — not a simply case of being one product led to a plant. So hopefully, that gives you a bit of inside vision.
Nicholas Read
And the second part of Shannon’s question was, is the 360 to 380 guidance at Pilgan for 5.3% to 5.7%? Or for 6% product?
Dale Henderson
5.7%.
Nicholas Read
Excellent. Thanks very much, everyone, for your questions. I’ll hand back to Dale.
Dale Henderson
Thanks very much, Nicholas, and thank you all for those who have dialed in today. I appreciate all of the great questions we fielded there. September, of course, has been a great quarter for production volumes, cost and pricing. That will play through to a really strong balance sheet. And looking forward to many quarters like this to come and going well. Thank you for your time today and look forward to future updates. Thank you.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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