Syrah Resources Limited (SYAAF) Q4 2022 Earnings Call Transcript

Syrah Resources Limited (OTCPK:SYAAF) Q4 2022 Earnings Conference Call January 30, 2022 7:00 PM ET

Company Participants

Shaun Verner – Managing Director & Chief Executive Officer

Stephen Wells – Chief Financial Officer

Conference Call Participants

Mark Fichera – Foster Stockbroking

Alex Ren – Credit Suisse

Operator

Thank you for standing by and welcome to the Syrah Resources Limited Q4 Quarterly Results Update Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead.

Shaun Verner

Good morning, everyone and thank you for dialing in today. With me on the call is Stephen Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Business Development and Investor Relations. Today, Syrah released its December 2022 quarterly results, covering operations, market conditions, the Vidalia initial expansion and further expansion projects and the outlook for natural graphite, active anode material and their end-use markets. And we’ll use the presentation we released today for this discussion.

It’s been an eventful period for the company and in some ways, that’s indicative of the EV and battery market overall. On this front, there is a clear gap between the shorter lead time battery and EV developments versus the raw materials, downstream processing capacity and localizations required to facilitate them. Customers, investors and other public stakeholders are increasingly aware of what that means to supply and prices. Demand continues to grow very strongly and broader macroeconomic and geopolitical trends and making development and expansion, more complex and more expensive. Whilst we encountered some short-term challenges during the quarter, Syrah has a significant incumbency advantage and is advancing towards becoming a large-scale vertically integrated natural graphite anode material supplier. The favorable upstream market setting, for natural graphite is translating to high demand for Balama products. And we’re now closer than ever to the market requiring Balama’s full production capacity and beyond to satisfy demand.

Our long-term vision is to grow Syrah’s downstream business to become a leading supplier of our own material products globally. Capitalizing on the benefits of vertical integration with our world-class Balama graphite resource and operation.

Summarizing the company’s unique position and value proposition on Slides 3, 4 and 5 of the presentation. Syrah is a key participant in the global natural graphite market which is expected to grow by 4x and the lithium-ion battery anode material market which is expected to grow by 7x over the next 10 years. Syrah is the only vertically integrated natural graphite anode material supplier outside of China, that’s producing qualified anode material and producing upstream natural graphite that sold into the Chinese market. In use today in lithium-ion batteries and electric vehicles.

Our Balama natural graphite operation in Mozambique is unique with 350,000 tonnes per annum production capacity in a global natural graphite market of approximately 1.3 million tonnes per year currently and a more significant position in the natural graphite market for battery anode materials specifically. The EV and battery end-use markets underpin higher capacity utilization of Balama in coming years. Other ex-China projects with relevant potential production volume is still some way from production, especially where downstream integration is part of the development strategy. Balama at design capacity is based on reserves for a 50-year mine life and there is immense growth potential from a 1.4 billion tonne resource. Balama both our intended volumes and customer demand due to the unprecedented shipping constraints in 2022, Balama produced a record 163,000 tonnes last year, demonstrating its importance to global supply.

Vidalia is the side of our downstream active anode material facility in Louisiana. We’ve been operating there since 2018, having recognized the market reliance on China before then, something that’s now increasingly recognized in the critical minerals government policy agenda. Noting that natural graphite from Balama has been in use in EV batteries for a number of years. Vidalia material has been in qualification and testing with auto OEMs and battery manufacturers for the last 2 years. In the first phase of commercial expansion is well underway which will deliver 11.25 thousand tonnes of active anode material capacity for year. We’re also nearing completion of the definitive feasibility study for expansion to 45,000 tonnes per annum, underpinned by market demand, significant customer uptake interest and U.S. domestic government policy tailwinds. And our plan is to accelerate development of this expansion subject to the necessary funding and customer commitments.

We have a contract in place from December 2021 with Tesla for 8,000 tonnes per annum or 70% of the production from the first phase expansion of Vidalia. In December 2022, Tesla exercised an option to purchase a further 17,000 tonnes per annum for a combined 25,000 tonnes or 56% of the production capacity from an expanded Vidalia facility. And we have MOUs in place with Ford and SKO and LG Energy solution with Vidalia supply. We’ve also closed a US$102 million Department of Energy loan under the Advanced Technology Vehicles Manufacturing Program, for the first expansion and are negotiating a US$220 million grant from the DOE to fund a significant proportion of the further expansion at Vidalia to 45,000 tonnes per annum.

We’re making excellent progress with Vidalia’s expansion projects and creating a differentiated downstream position that’s not easily replicated. Syrah has developed a unique position, the fact that we are the first vertically integrated natural graphite anode material operation in the U.S. has resulted in extensive engagement with potential customers and government stakeholders. Our expected anode material OpEx cost position at Vidalia is competitive with China. CapEx is more expensive. However, there’s no surprise in that CapEx challenge and we have planned for it. And with Balama in the upstream, the size of the asset is such that at full capacity will be a first quartile cost producer with significant expansion potential.

Governments and industry participants recognize the key role of critical minerals, such as graphite in facilitating transport electrification and energy storage development, toward the objective of reducing global carbon emissions.

Last year, the U.S. Senate passed the historic Inflation Reduction Act 2022 which will offer tax credits and financial support to end users of electric vehicles and material producers to mobilize the development of the domestic battery and battery raw material supply chain and to accelerate the adoption of EVs in the U.S. We expect that Vidalia products will qualify as a critical mineral processed in the U.S. for the EV tax credit under this act, underpinning demand and that our U.S. operating subsidiary will also qualify for direct tax credits. It’s also apparent that this legislation is promoting significant investment allocation towards the U.S. EV and battery supply chain which will also benefit the Vidalia facility. Other consumer regions such as the EU are progressing policy to ensure similar significant investment allocation that’s required for local battery supply chain development.

Syrah has a great future opportunity with its combined position of Vidalia and the globally significant graphite resource and operation at Balama. Tesla’s commitment to offtake additional active anode material volume, MOUs with Ford and SK and LG and broader customer interest for Syrah’s products continue to highlight both the requirement of significant ex-China natural graphite supply to help bridge the imminent supply deficit, particularly in fines and the need for a localized supply of active anode material in both the U.S. and other markets outside of Asia. Syrah’s engagement with the potential downstream customer base has highlighted broader concerns with the looming input material production capacity deficit and high dependency on imported anode material supply from Asia. We believe Syrah will have compelling natural graphite and active anode material costs and margins as the market evolves and production volumes increase.

On Slide 6, our environmental, social and governance activities are fundamental to our company and every board that passes highlights the criticality of this focus and of our commitments. Given the illegal industrial Action at Balama which occurred in Q4, I want to comment on the work done to move ahead positively and capitalize on the strong relationship with our workforce and remind you of the approach and commitments in Mozambique, ensuring that our value to the local, provincial and national communities in the country is cleared. Our commitment to local employee development remains very strong. Of almost 1,500 direct and contractor employees, 98% are Mozambican nationals and 56% are from the local host communities around Balama.

We have a localization focus and a demonstrated history of skills and career development. Our 2 general managers are in-country and many senior leaders in Mozambican and we’ve invested heavily in training and development since initial employment the operation started in 2015 and ’16. We have an active union covering the majority of the Balama workforce and the company-level collective agreement ratified by the labor authorities covering employment conditions. And during the fourth quarter, we successfully completed the periodic renewal of the labor agreement with the designated representatives of our unionized workforce, leading to improvement in conditions for all employees that are covered by the CLA and there’s been no issue with regard to industrial relations since October.

Since Balama’s inception, our total economic contribution to Mozambique has been over US$360 million and we’re deeply committed to improving education, health and sustainable income generation in the district, through local development committed capital and development projects. Success of Balama comes hand-in-hand with our employees, community and government relationships. And given the very long-term nature of the asset, we will take the time to get them right. We’ve released a lot of further information on our ESG position today in our quarterly sustainability update which is available on our website.

We’ll now move to the highlights for the quarter and I’ll hand over to Steve here to make some comments on the corporate position and some market context. Steve?

Stephen Wells

Thank you, Shaun and good morning, everyone.

I’m now on Slide 7. Our health safety environmental performance of Balama remains outstanding. The total recordable injury frequency rate or TRIFR Balama was 0.7 at quarter end has remained ever below 1 since late 2018. TRIFR at Vidalia was 10.5 at quarter end and there were no loss time injuries sustained through the quarter, with a significant increase in hours due to the ramp-up in construction activities at the Vidalia project. The medical treatment injury was sustained by a construction contract during November which resulted in Vidalia TRIFR increasing from the end at Q3. Shaun will provide the update on operational and project performance in fourth quarter 2022 shortly. Syrah finished the fourth quarter with a cash balance of $90 million, compared to $136 million at the end of Q3.

Total quarter cash outflows were $46 million versus $33 million last year with approximately $38 million being related to investing activities. With the Vidalia project moving into more intensive construction, Vidalia cash outflows were $30 million in Q4 and the remaining investment capital represented the construction of the Balama TSF cell 2. Remaining $8 million cash outflow related to Balama working capital and corporate costs. Balama operating cash flows were impacted by the operational interruptions and relatively higher working capital at quarter end with natural graphite inventory positions increasing as production returned to higher volumes in December.

As previously indicated, due to cost pressures experienced globally in the last 12 to 18 months. We withdrew our Balama C1 cost guidance which we first provided in late 2019. Given our expectations of a sustained increase in production volumes, we are now providing guidance at a 20,000 tonnes per month production rate and have revised that Balama C1 cash cost guidance to $430 to $480 per tonne at that 20,000 tonnes per month rate. There is still uncertainty around diesel prices, in particular which is reflected in the range provided with the top end of the range reflecting current fuel prices and also noting that the cost guidance reflects the implementation of the solar battery system operating at full capacity which is expected in the second half of the year. It also reflects updated labor costs associated with the renewal of the company level agreement or CLA.

And as a result, Balama cost guidance may not align with current levels and also the dynamic backdrop, particularly in relation to diesel costs and certain imported consumables. Equally, however, Balama’s cash costs are expected to reduce further as the production rate increases beyond 20,000 tonnes per month and its improvement initiatives continue to be embedded. Syrah is progressing funding processes with the U.S. DOE and DFC on funding requirements for Vidalia Phases 2 and 3 and Balama, respectively. In December, Syrah closed its ATVM loan facility of $102 million from the DOE to support financing of the Vidalia initial expansion project for 11.25 thousand tonnes per annum. The company and DOE are towing the first advance from the loan within the March 2023 quarter, aligned with the capital spending program for the Vidalia project.

We also continue to work through negotiation with the DOE for an additional grant of approximately $220 million to fund a significant proportion of capital cost to expand Vidalia further to 45,000 tonnes capacity and we are targeting finalization of this within the June 2023 quarter. Our selection of the grant demonstrates the criticality of Vidalia to the U.S. battery supply chain. We have won 20 projects at our over 200 applications awarded a grant and were awarded the largest demand for materials processing project out of all successful applicants and 1 of 5 to receive a full 50% allocation towards estimated CapEx. We are also progressing a potential loan for Balama from the U.S. Development Finance Corporation with due diligence and commercial engagement through the quarter. DFC is currently preparing to publish an environmental and social impact assessment for public comment which is a critical step in their approval process.

Moving to Slide 8 and current marketing conditions. 2022 was outstanding with strong momentum in EV production and sales globally. And with broad-based electrification of model ranges planned by major automakers this decade, the trend is likely to continue. To underpin the substantial energy transition underway, further large commitments are being made to develop battery manufacturing capacity across the globe, including in North America and regionalization of supply chain remains a major trend in the EV and battery markets. Positive momentum continued in our key leading indicator EV sales. Global EV sales grew 68% in the quarter, compared to the prior year to nearly 4 million units with record monthly sales in November and December. Global EV sales grew 64% in 2022 versus 2021, to nearly 11 million units. EV sales and battery demand growth drove demand for anode material with anode material production outpacing strong growth in global EV sales through 2022, reflecting industry expectations of continued growth momentum. We note, however, that in December, Chinese anode production did weaken from record high levels due to consumption of anode inventory positions and operational and logistics disruptions due to COVID-19.

Slide 9 provides an updated perspective on regional battery manufacturing capacity pipeline forecast and announcement and the growth ahead for the industry is astonishing. Providing a very strong backdrop for the company to increase production capacity utilization at Balama and a great setting for Vidalia’s various stages of expansion that are well supported by customers, the regulatory environment and potential funding options. Global OEM and battery participants have seen the opportunity of building significant production capacity in the United States, often across multiple states. This was recently announced a 100-year [indiscernible] for our expansion of its Nevada Gigafactory in addition to its development in Texas is an example of this. And with the combination of policy support cost and market evolution in the U.S.A. has proven to be the correct choice for Syrah’s first AAM facility commenced back in 2018.

I’ll now hand you back to Shaun.

Shaun Verner

Slide 10 outlines our long-term vision and pathway to growing Syrah’s downstream business to become the leading supplier of anode products globally, capitalizing on the benefits of vertical integration with the Balama graphite operation. To succeed in this strategy, provision of production capacity in the key markets is needed to underpin resilient and localized supply chains to customers.

In addition to the Vidalia project expansion, the 11.25 thousand tonne facility which I’ll talk about shortly. The last quarter of 2022 saw Syrah make strong progress on the potential further expansion to — of Vidalia to 45,000 tonnes on the feasibility study, customer interaction and funding fronts. And as part of the company’s vision and given market fundamentals, Syrah is also progressing the evaluation of a large-scale anode material production facility in Europe. With the assessment of the strategic merits of such a development through a partnership and we’re engaged with high-quality counterparties in this process. These downstream project opportunities are all possible given the tremendous Balama capacity available to support these expansions, as well as the clear market demand for a vertically integrated ex-China sourcing material.

Moving to Slides 11 through 15 and an update on the key points of Balama’s production, sales and logistics performance in Q4. Sales were 28,000 tonnes constrained by production at a higher weighted average basket price of US$716 per tonne. Production was 35,000 tonnes, impacted by the timing and sequence with operational interruptions. 19,000 tonnes of production in December with good operational performance in uninterrupted operations and logistics movements showed that the plant still operates well post the interruptions. C1 costs, FOB Nacala are of $709 a tonne included an aggregate $175 a tonne impact from fixed costs during operational interruptions and higher diesel costs compared to the end of Q1.

Balama performance through Q4 was impacted by 2 interruptions in subsequent production ramp-ups. Illegal industrial action caused production to be suspended 26 days in October and the proportionary security measure resulted in a 1-week impact to production in November. Balama production in December with uninterrupted operations and logistics movements was strong, as I mentioned, at 19,000 tonnes with production rebuilding finished product inventory. Balama average and maximum daily production run-rates were 19,000 tonnes per month and 25,000 tonnes per month, respectively, during the campaign production runs over the quarter.

Notwithstanding ore feed variability and processing and stability in the ramp-up of operations, Balama achieved stable grade and recovery compared with the September 2022 quarter. Plant recovery was 80% in December. We’re focused on moving towards our 90% medium-term recovery target with the benefit of greater operational stability. It’s also important to comment on security at Balama and the surrounding district. Since the interruption in November which saw us take a precautionary measure to remove stuff in site for 2 days. There has been a marked increase in the commitment with Mozambican and international security authorities to ensuring stability in the Southern District of Cabo Delgado, specifically but also across province more generally. There’s been no further disruption to Balama since that time with operations, people movements and logistics.

I’ll hand back to Steve to give some more detail on cost and sales.

Stephen Wells

Thanks, Shaun. Balama C1 costs were higher this quarter due to the unplanned operational interruptions, sustained high government set diesel prices for Balama power generation and higher cost of imported materials. We continue to evaluate and implement operational cost savings to offset these inflationary pressures and note that C1 costs should trend lower with recovery uplift and other improvement initiatives, including the solar and battery project. And most importantly, with increased production levels and shipping constraints fall away and we leverage our fixed cost base.

I previously provided our updated view on C1 costs of between $430 to $480 per tonne at a 20,000 tonne per month production rate. The company has worked diligently and in good faith through the periodic review of the CLA and the successful renewal of the CLA provides several improvements to the conditions of employment for approximately 450 employees covered under this agreement and is expected to bring further stability to Balama.

Moving to Slide 14 which contains further detail on the graphite sales and marketing side. We reported lower sales in Q4 of 28,000 tonnes due to the operational interruptions of Balama which impacted the availability of finished products for shipment with most inventory only available at port through December. Pleasingly, natural graphite sales were unconstrained by container availability for Balama shipments from Nacala with 10,000 tonnes shipped in December. No break bulk shipments were completed in the quarter due to the timing of inventory availability and we expect to recommence this activity in the first quarter.

In short, we could have sold and shipped more product without significant interruptions to Balama operations. As you will be aware, the winter period represents a seasonal outage of Chinese domestic production. Natural graphite production in Heilongjiang province in China has declined due to major suppliers facing water supply issues and seasonal shutdowns for the winter outage. As a result and over the medium to long term, at expected EV demand levels in China and globally, Chinese natural graphite demand will require increasing imports. Nevertheless, due to the impacts of changing Chinese policy towards COVID-19 impacting immediate demand, forward demand in sales orders for Balama products in China and particularly in the anode market, have somewhat softened over year-end against historically high levels in 2022.

In particular, there has been short-term destocking evident in the supply chain and operational and logistics disruptions due to COVID-19 reopening in China and also Chinese New Year closures. However, expected growth in EV and energy storage markets and the customers remain concerned about availability of Chinese natural graphite mines and the future of market balance. The weighted average sales price increased to $716 per tonne in the quarter, reflecting the stable and strong market conditions with funds accounting for 81% of product sales. Fines spot pricing was stable compared to last quarter, with strong downstream anode market demand and lower Chinese production.

Course like prices ex-China remained strong and stable due to ongoing supply disruptions, including from the U.K. — Ukraine and Russia. Sea freight volatility and surcharges remain evident through the quarter with Syrah’s average container shipping unit costs in Q4 at 3x to 4x the long run average. However, the global container shipping market is improving, with growth in a vessel fleet, easing of port ingestion, improving scheduling reliability and weaker trade demand trends. Global container freight rates are almost 80% below recent peaks and approaching pre-COVID pandemic levels. East Africa vessel services and container availability improved in December 2022 and in 2023 already due to easing demand on major trade lanes.

Freight rates for Syrah’s Nacala container and Pemba breakbulk cargoes have declined from 3x to 4x the long-term average through 2022 to less than 2x in the March 2023 quarter. The container — the company will continue to use the Pemba export route for Balama products in addition to container shipments from Nacala, subject to overall shipping availability, cost and customer preference. The integration of breakbulk shipping from Pemba in combination with container shipping availability will support Balama’s sales and production of at least 20,000 tonnes per month.

I’ll now hand you back to Shaun.

Shaun Verner

Moving on now to Vidalia on Slides 16 and 17. We’re making strong progress with the Vidalia expansion projects and in our strategy to become a vertically integrated natural graphite anode material supply alternatives, supply alternative for the ex-Asia markets. Syrah is a first mover in the integrated downstream anode market outside China and we’ve created a differentiated position at Vidalia which is not easily replicated. Our offtake agreement to supply anode material Tesla from the facility is supported the initial expansion. And in December, we agreed the final specification of Vidalia products fulfilling a key condition to Tesla’s offtake obligation.

As mentioned earlier, Tesla exercised its binding option for an additional 17,000 tonnes per annum or a combined offtake to 25,000 tonnes per annum from the potential expansion to 45,000 tonnes the production capacity at Vidalia. This key customer commitment for the Vidalia further expansion project represents a combined 56% of the planned production capacity for the operation. Syrah also announced a further nonbinding MOU with LG Energy Solutions for up to 10,000 tonnes per annum supply from Vidalia. We’re advancing commercial negotiations towards offtake agreements with these Tier 1 customers with a focus on maximizing the value of Vidalia for shareholders. We’re strongly advancing further commercial and technical engagement with other potential customers to provide future optionality in contracting volumes or spot sales. Qualification and iterative testing programs are progressing well.

Following the announcement of a final investment decision on the initial expansion of Vidalia in February 2022, detailed engineering is effectively completed and equipment fabrication and deliveries and on-site construction activities are now intensively progressing. The project is being overseen by our own high-caliber team alongside the Worley Group. The effective completion of detailed engineering has enabled equipment fabrication and construction to progress in line with the planned schedule. Procurement for all key construction activities and equipment were advanced with contracts for US$150 million in total installed capital costs awarded. The project remains on budget after this procurement effort with an acceptable amount of project contingency remaining unallocated.

All major mechanical, electrical and instrumentation and equipment work packages are proceeding now showing the photos in today’s releases, concrete foundations and slabs have been completed and erection of permanent buildings has commenced. Building steels, pipe rack structural steel, tanks, cable spool reels and fabricated piping and being delivered to the site and erected. And all overseas fabrication of critical equipment is complete and delivery of this equipment commenced during December 2022 quarter and will continue into the March 2023 quarter. Construction activities in the March quarter will focus on steel erection, roofing and cladding for permanent buildings, structural steel and equipment installation in these buildings, structural steel levels, final mounting of the first power distribution center and taking delivery of the second power distribution center.

Operational readiness for the Vidalia facility which includes preparing business and maintenance systems and operating teams to move from commissioning to operations, is on track for commencement of operations in the September 2023 quarter. The DFS on the expansion of Vidalia’s production capacity to 45,000 tonnes of anode material inclusive of the 11.25 thousand [ph] tonne facility, is ongoing with Worley Group in nearing completion. And this will enable the Syrah Board to assess an investment decision in conjunction with customer and financing commitments.

Diving Syrah’s downstream business is underpinned by Balama and its resource reinforcing why we’re so intent on continuing to develop both labor and community relations for long-term success at both operations. The opportunity to consume a significant proportion of Balama’s production at Vidalia over time and to potentially expand Balama to supply third-party customers further are important factors in the overall upstream supply and demand balance globally. Even at an expanded 45,000 tonne facility at Vidalia only approximately 25% of Balama’s current production capacity would be utilized internally.

To conclude, on Slide 22. EV sales growth, a constructive demand environment for anode material and Chinese supply challenges are driving good demand and supportive pricing for Balama products. We’re focused on increasing Balama production and sales to at least 20,000 tonnes per month and achieving a sustainable C1 cash cost position. Construction of Vidalia’s initial expansion is progressing within schedule and budget with an accelerated pathway to 45,000 tonnes of Vidalia being derisked by feasibility, customer and funding work streams.

DOE’s loan and grants and DFC loan processes to fund the company’s capital requirements are progressing well, helping to maintain liquidity, broaden the capital structure and being sized to ensure the balance sheet is prudently geared. The DOE and DFC commitments clearly highlight the strategic importance of Syrah’s integrated operations to EV and battery supply chains. The current market and Syrah’s progress demonstrates the unique position we occupy with the largest global integrated natural graphite operation at Balama and the forthcoming vertically integrated supply of natural graphite anode material outside Asian markets. We look forward to keeping you up to date with the company’s progress in 2023, a year in which we anticipate the company will achieve many exciting milestones.

And with that, we’ll move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mark Fichera with Foster Stockbroking.

Mark Fichera

Shaun, just a question on Vidalia regarding offtake. You previously had or you’ve got the MOUs with Ford, the BlueOval SK JV and LG. I was just wondering, previously you targeted a deadline date to execute those, I think, by the end of calendar year 2022. I was just wondering, are those — with those MOUs of AAM, have they got any deadlines that you’ve got in mind and in terms of how they’re progressing and why they sort of went over that sort of December 2022 end.

Shaun Verner

Thanks, Mark. Yes. Obviously, that initial target was the end of the year. I think there was a good degree of optimism as we emphasized MOU and the level of engagement with those potential customers is very strong. And the addition of the LG MOU during the quarter indicates that, that commercial interest and commercial tension for potential offtake both for the balance of Phase 2 or what we call the initial expansion and Phase 3, the additional expansion to 45,000 tonnes remains very positive. So I think we’re trying to balance the completion of the feasibility study, the funding progress and the right mix of commercial outcomes to support an investment decision. And clearly, we’re targeting — moving towards that investment decision in the coming months. So we don’t have a hard deadline on it. Suffice to say that it is critical to the assessment of an FID for Vidalia.

Mark Fichera

Right. And just one more from me. On the freight costs you mentioned, they’re now down to less than 2x the historical average. I was just wondering can you sort of maybe quantify that in terms of dollars a tonne, what that might be?

Shaun Verner

Yes. I mean we previously said that our long-term average prior to the unprecedented escalation in that market was around $50 a tonne across the book. As we said today, it’s less than 2x that now and continuing to come down. If is significantly between different trade lanes but we expect that the freight market conditions will continue to normalize towards that long-term average over time.

Operator

Your next question comes from Alex Ren with Credit Suisse.

Alex Ren

A couple from me, please. Just so if I haven’t provided 2023 production guidance but did provide a forecast like cost forecast, $430 to $480 at 20,000 tonnes a month. Is that the rate we should expect throughout next year disruptions?

Shaun Verner

Yes. Thanks, Alex. I mean as those who have been with us for some time know, we are quite careful about telecasting production forecast, given our significance in the overall market supply/demand balance. We’ve been clear in this that we are seeking to produce and sell around 20,000 tonnes per month but we will be guided by market conditions. And if market demand supports an increase from them, we set to increase from there but very much driven by how the supply demand balance evolves and ensuring that we remain very cognizant of our impact on the overall supply demand balance.

Alex Ren

Yes, makes sense. Understood. And next question on inventory, total inventory 20,000 tonnes there. Just wondering how much of that is already at Vidalia and what’s the comfortable inventory level there for the Stage 1 set up?

Shaun Verner

The inventory at Vidalia at the moment is low. The initial fields for that will be done through the course of this year. Obviously, the total consumption to the 11.25 thousand tonne anode material facility is only around 21,000 tonnes of Fines from Balama. So there’s not a significant amount of that inventory yet required at Vidalia but that will happen through the course of this year. The vast majority of the inventory that we built up through the quarter is destined for the China market. Obviously, we fines primarily going into the anode market there. And as we said during the call, we took time to rebuild that inventory position. And consequently, we didn’t quite get to a black box shipment in Q4 following the interruptions we had earlier in the quarter.

Alex Ren

Understood. So basically, now inventory has normalized and we should — like going forward, we should [indiscernible] normalized operations like operations, production and logistics. Is that…

Shaun Verner

Yes, I think that’s absolutely a fair assessment all the way through 2022. We were constrained every single month by the ability to have container availability and vessel schedules meet our sales targets. As Steve mentioned earlier, nearly all of the constraints in the container market have released. And there’s good availability of vessels from a breakbulk perspective. So we’re very comfortable with the improvements in logistics as we head into 2023.

Alex Ren

Got it. Got it. And next one is on Vidalia stage offtake. Obviously, Tesla is taking the 70% but there’s still 30% uncontracted. Just are you engaging with other customers on your qualification? Just trying to figure out how you can sell that remainder, 30% out of the stage line.

Shaun Verner

Yes, absolutely, we are. And as we’ve said previously, we’re very much focused on combining our thinking around the remaining volumes from the initial expansion with the planned volumes from the expansion — potential expansion to 45,000 tonnes of capacity in our commercial arrangements. So much of our commercial discussion considers both the balance able from the first phase as well as potential volumes from the next phase. And our testing and qualification processes, both with the customers we have announced MOUs with as well as a number of other potential customers continue to progress.

Alex Ren

So basically, you’re saying the remaining volume has been like under test with SK Ford and LG. And just trying to — just look at the presentation, Vidalia is expected to ramp up to full capacity in 18 months, right? So is that basically just running against the clock — 18-month clock or 24-month clock or so for them to like succeed in qualification.

Shaun Verner

Yes. I mean part of it is the qualification process. But equally, some of the timing around the commercial arrangements has been driven by our desire to ensure that we have the best view of market conditions and potential customers in the process. So the qualification process continues to progress well and we don’t see that as a constraint in settling the balance of offtake from the first expansion and there are multiple examples, not just with us but with other commodities in the battery supply chain, commercial arrangements being finalized before qualification is complete with a contingent element on that qualification being achieved.

Alex Ren

Yes. Got it. Got it. And last one for me, just a bit on the medium to-long-term prospects in Europe. Could you give us a bit more color on the discussions, are you having any discussions with government on subsidies for financing and right now, what like — what’s your ideal approach to expect the footprint, I mean there? Are you thinking about a joint venture with downstream customers, or you going away, similar to Vidalia?

Shaun Verner

Yes. We’ve been pretty clear that we believe that Europe would be best facilitated by some type of joint venture arrangement basically to accelerate the process and we’re having gauged broadly across different industry and supply chain participants through that assessment process. As to scale in timing, I think certainly, we would see a facility similar size to an expanded by Vidalia facility being the best option for Europe, somewhere in the 40,000 tonne range. But that would very much be dependent on how the commercial assessment continues to evolve with potential partners. With regard to government funding options, certainly, in Europe, there are similar programs and there is a lot going on at the moment, looking at further development or potential funding of the supply chain expansion. We are focused first on the right partnering arrangements. And as part of that, we will certainly assess what funding arrangements are available.

Operator

[Operator Instructions] There are no further questions at this time. I’ll now hand back to Mr. Verner for closing remarks.

Shaun Verner

Thank you very much for the attendance today. We’re looking forward to getting everyone up-to-date as we progress with both the Vidalia project and the Balama continuing capacity utilization growth through the course of the year. Thank you very much.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.