Earnings Transcript for SYR.AX - Q4 Fiscal Year 2023

Operator: Thank you for standing by, and welcome to the Syrah Resources Limited Q4 Quarterly Results Update 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 Shaun Verner, Managing Director and CEO. Please go ahead.

Shaun Verner: Thank you. Good morning, and thanks for joining the call today. With me are Steve Wells, our Chief Financial Officer and Viren Hira, our General Manager of BD and Investor Relations. And we'll use the slide deck we released along with today's report for this call. On Slide 3, we continue to progress toward our vision of becoming a major integrated anode material supplier to globally significant customers. And today we'll cover both Q4 operating performance and work through our views on how some fundamental geopolitical actions and market developments have pre-positioned and strengthened the strategic value of the Balama and Vidalia assets despite near-term uncertainty. On Slide 4, we continue to differentiate Syrah from Chinese producers and from development projects by designing and operating sustainability, a key driver from the ground up. And I encourage you to review our quarterly sustainability report, which will be up on our website from later today. We wanted to highlight in particular the safety commitment and performance across the Vidalia project through the last two years, and the commencement of the solar and battery system at Balama as key milestonnees through the quarter, as well as our pursuit of IRMA certification as a first in graphite globally. Moving to Slide 5, and our Q4 2023 performance. The quarter was marked by the impacts of China's announcements and later implementation of graphite and anode product export license controls. And our activities were focused on understanding and adapting Balama sales and production to that market uncertainty whilst progressing the Vidalia anode material plant commissioning, demobilizing the vast majority of project resources there and continuing to hand over to operations. At Balama and Skydas (ph) last quarter, one production campaign was undertaken with 20,000 tonnes of natural graphite produced and 21,000 tonnes sold ships including inventory to Vidalia. Weak market conditions, the details of which I'll cover in more detail shortly led to a focus on Balama campaign production and cash preservation as the basket price declined 7% quarter-on-quarter to $490. Operational performance saw solid recoveries at 77% despite campaign operations with an FOB C1 cost during operations of $534 a tonne, impacted by lower production volumes and slightly below target recoveries and non-operating period costs of $4 million per month in-line with our expectations. With average sea freight costs at $80 a tonne expeditely currently, clearly low volumes and current cost structures can't be maintained definitely. With greater clarity on the implementation of China's export controls being the major factor determining the strategic options for Balama's operating mode in the months ahead. At Vidalia, significant progress was made in commissioning the anode material plant, but the target of production prior to the end of Q4 was not reached given the combination of delays in purification plant commission and further impact of weather during January. The commissioning is focused on safely operating and ramping up all areas of the 11.25000 (ph) tonne facility at Vidalia with production of unpurified and purified precursor materials now achieved and the final focus now on pitch coating and carbonization. We'll be ramping up anode material production imminently and working through the processes of product qualification for commercial sales with our customers. While capital equipment and construction expenditure has been broadly within expectations, the timing delay on first production against plan has been the key factor, we are seeing total installed capital costs increasing to US$209 million. Major progress was made in commercial and funding processes in Q4 with the advance of negotiations for offtake sales from Balama, the long-term contracts with developing ex-China anode material facilities, which we expect to make further announcements about soon and progress in anode material commercial arrangements to underpin further expansion of the Vidalia facility. Both of these streams of work evidence the increasing criticality of the Balama and Vidalia assets to the build-out of the ex-China supply chain. As one step in our plans the European Expansion, we've also signed an MOU for assessment of joint venture development for an anode material facility in conjunction with Tees Valley Graphite in the U.K., accessing the attractive infrastructure of the Wilson Industrial Park and Trade Zone and with a strong focus government funding, and we’ll provide more insight into this in future updates. Steve, will cover the financial position later, with the final advance of the DOE loan for Vidalia's construction and progress on the DFC loan to Balama, have been primary focus in recent months along with further DOE funding progress for future Vidalia (ph) expansion. On Slide 6, the full-year picture of Balama was enormously impacted by China's dominant salt (ph) and government policy intervention in synthetic graphite, natural graphite and anode material markets impacting overall demand for Syrah. Total 2023 natural graphite production across our campaign was 94,000 tonnes with plant recovery averaging 74% and an 89% fines, 11% coarse flake split. 94,000 tonnes were sold and shipped for the year including 9,000 tonnes of Vidalia inventory and a weighted average sales price to customers of $592 a tonne was achieved. Strategy of maintaining operating capacity and moving to a campaign operating mode is necessary at Balama both the market readiness and for Vidalia supply, but obviously impacted the cash position. Matching Balama sales and production, our cash flow breakeven position remains the urgent minimum target for the company, but has been significantly impacted by Chinese commercial and government actions through the course of the year. On Slide 7, the construction and commissioning at Vidalia of the first integrated commercial scale natural graphite anode material plant outside China continued through Q4 and into January with some very strong progress albeit behind schedule. Positively, the delays experienced in commissioning the purification plant have now been resolved and first purified spherical graphite has been produced, which is another first for commercial plant in the U.S. Recently, the coldest weather in our area of Louisiana in 30 years had a significant impact requiring hard freeze preparation as the plant was in commissioning, actions that mostly would not be necessary in normal operating mode, but which essentially delayed activity in further two weeks. The operating team has however adapted quickly from project into operating mode and are focused on the high quality and consistency required from a battery anode material plant. We'll provide further updates around commissioning and production very soon. Moving to recent market conditions on Slides 8 and 9. Overall, despite some recent negative commentary on EV growth rate slowing, the increase in sales during 2023, 37% year-on-year was again astonishing. We saw a continuing ramp-up in anode material demand, but disorderly supply in China, from expanded artificial graphite anode material capacity, the total Chinese anode material production growing 28% year-on-year, lower than EV growth rates and the increased energy storage battery demand implying that some drawdown in anode material inventory occurred through the year. Market conditions for Balama have been enormously challenging driven by sub-economic pricing of artificial graphite anode material in the China domestic market, reducing short-term demand for natural graphite anode material in China, and the major impacts of China's announcement and implementation of export restrictions in Q4, starting the burgeoning improvement in market conditions that were being seen in September and early October. China swung from a net importer of natural graphite halfway through the year as domestic natural graphite demand fell, spherical graphite produces reduced production due to low precursor prices and import demand was further impacted by export license uncertainty. Finally, November saw domestic producers in China strongly front run the implementation of the export controls with three to four times the normal monthly volumes exported, driving ex-China markets into disorderly purchasing patterns. Prices for natural graphite declined through the year as the impacts of Chinese commercial and government actions flow through to the market. Large segments of the Chinese graphite and anode market are now uneconomic with artificial graphite prices below cost in many plants, very low levels of utilization in artificial graphite anode material producers and spherical producers, natural graphite prices below the cost of production for most Chinese mines and low transaction volumes. But simply the current state of the Chinese market is unsustainable. Significance of China's actions on the near-term graphite and anode product markets as outlined on Slide 10, it can't be stated strongly enough. We’ve fundamentally altered the geopolitical and trade landscape for anode and the battery and electric vehicles supply chain. The imposition of export licensing at a national level was announced on October 20. The immediate impact was Chinese exporters seeking to export all available inventory ahead of the imposition of the controls. Given Chinese producer concerns over the granting of export permits, they also reduced feedstock imports, creating a perfect storm of short-term oversupply ex-China and reduced demand for imports into China. Overall, anode material demand is still strong and the supply chain ex-China will start to be stretched. NOEMs (ph) and battery producers are deeply concerned about China exports meaning new processing and trade flow options are under consideration in investment, but are not immediate fixes. In the medium term, this is very positive for Syrah. Simply put, either the world gives in and says Chinese supply of artificial graphite is the only anode solution both Balama and Vidalia will be critical to any other outcome. In the short term, the China export licensing process will influence Balama's operating rate, which further production campaign runs determined by demand, price, and inventory drawdown. Ex-China industrial customers of natural graphite are also concerned and as the short-term inventory purchased in November starts to be drawn down, their mines also turn to longer term supply certainty. We'll take the opportunity in a moment to frame how this is elevated Syrah's criticality to the global energy storage transition. First, I'll hand over to Steve, to provide an update on the current financial position and progress with various funding initiatives. Steve?

Stephen Wells: Thanks, Shaun. As of the 31 December, 2023, the Syrah Group had US$85 million in cash, including $47 million in unrestricted cash. Restricted cash includes cash at our Vidalia subsidiary, which is restricted under the DOE ATVM loan program, including cash from the loan drawdown and required to payments for construction purposes as well as standard project finance loan reserves for construction, which can be transferred to working capital reserves as production commences in the facility ramps up in volume. This compares to total cash of $81 million at the end of the third quarter, including $31 million of restricted cash and $50 million of unrestricted cash. During the quarter, we completed third and final drawdown under the ATVM loan facility of $32 million, resulting in an effective interest rate for the nine year loan of 3.98%, which is the weighted average interest rate across the three drawdowns at the 10 year U.S. treasury rate. We also issued the third tranche of the Australian Super Convertible Notes that were arranged in the second quarter of 2023. Delays in the completion of construction of Vidalia have contributed to a drawdown on cash, mostly due to the delay in completion rather than a significant increase in construction costs themselves. We expect total construction costs of $209 million, a 5% increase from the $198 million previously advised and 19% higher than the original $176 million advised. In addition to existing cash, we continue to work with the U.S. Development Finance Corporation on a $150 million loan facility for our Mozambique subsidiary, which owns the Balama mine with loan documentation received and drawdown to be effective as soon as practical after completion of that discussion. Simultaneously, we continue to progress due diligence with the U.S. Department of Energy under the ATVM loan program for Phase 3, the same program as the existing Phase 2 loan. Further Vidalia development costs will be driven by the pace of customer commitments. Looking forward, Syrah continues to focus on maximizing short-term sales from Balama, monitoring pricing dynamics and supply competition, and managing costs at Balama as closely as possible, noting that a significant amount of competing supply has moderated or stopped production and Chinese inventories have been drawn down. Further exploration of cost control will be undertaken in conjunction with the matching of Balama operations to market and requirements for Vidalia. Ultimately in the short-term, the evolution of the Chinese market will determine Balama's operating mode and the ability to generate breakeven cash flows and Syrah's overall position. We clearly have a very strong strategic position and development of ex-China sales will result in diversification away from China battery finds material towards increasingly interested ex-China counterparties as well as our internal use of Balama material through Vidalia. I'll now pass you back to Shaun.

Shaun Verner: Thanks, Steve. As we've noted, political and policy actions, commercial implications and market conditions have fundamentally shifted Syrah's global position. We believe it's critical to frame this as context for the coming years and for capital invested operational experience gained in customer relationships Syrah has in place for an unparalleled platform for generation of shareholder value. Moving to Slide 12, in short, the global graphite and anode market is in a state of structural flux, realigning along geopolitical lines and focused on security of supply which will drive margin and volume opportunities for Syrah in the medium term. The key difference being that many of the things that we in the past believe may happen, are now occurring. This may well be countercyclical to other battery materials as minimal ex-China upstream natural graphite supply options are being developed today due to weak price signals, with anode processing capacity investment decisions are being taken to service the future nearly 1 million tonnes our ex-China anode material demand expected by 2030. And this may lead to potentially significant enduring imbalance in ex-China natural graphite and anode supply that Syrah's developed assets will benefit from. Syrah's advantages into this opportunity are the ability to provide long-term large scale integrated supply, strongly differentiated ESG position contributing to emissions reduction, geopolitical independence and well developed commercial relationships and clear compliance with U.S. and European ownership, funding and incentive requirements. On Slide 13, Syrah leads the ex-China industry in development and operations especially where integrated upstream supply into anode material is critical. Whilst Korean and Japanese anode material production is well established, it lacks upstream natural graphite and precursor supply and integration and remains today wholly reliant on Chinese feedstocks and is only now developing supply options for IRA and FIOP (ph) compliance. With more than 10 years of development, Syrah is at least five and probably eight years advanced on ex-China project peers with more than $700 million of investment to-date in the development, operation, product qualification and commercial sales pipeline and deep operating experience. Critically, the fastest ex-China capacity to be developed given the current need for independence will be anode material processing capacity and not mine supply. Syrah's Balama operation, therefore, stands to benefit significantly from this expansion, which lacks independent foreign entity of concern and inflation reduction act compliant natural graphite supply. In this position, we've seen the support of U.S. government funding agencies, something that's only been possible through long engagement and due diligence processes. On Slide 14, there is no doubt that current low graphite prices do not support most existing operations, let alone the inducement of new supply. Importantly, many of the new supply projects out there are dependent on high coarse flake or industrial market price forecasts to support their development. A significant increase in the funds price is therefore required to reduce any material investment. Much of the project base we see through experience is underestimating capital and is optimistic on timing. So, not only a higher price is required to see new supply, but in a world where ex-China project funding is extremely difficult, we believe the supply curve is likely to steepen significantly. And this could potentially occur concurrent with periods of oversupply and weak pricing for other battery materials such as lithium and nickel generating a differentiated value opportunity. On Slide 15, the lack of ex-China supply creates demand as China's dominant share of production and geopolitical headwinds drive a need for increased production capacity outside China, Balama and Vidalia supply is absolutely critical to address that imbalance. There’s a strong pipeline of battery manufacturing capacity in North America and Europe, leading to demand for more than 700,000 tonnes of natural graphite feed and 350,000 tonnes of natural graphite anode material required for ex-China battery facilities if they're operating capacity by at the end of 2025, the volume expected to triple by 2035 and unable to be supplied given the existing ex-China capacity. Supply versus demand is highly geographically disproportionate in anode materials and natural graphite today, with 90% of anode material and 70% of natural graphite coming from China, which is fundamentally different from other battery materials leading to an urgent need for ex-China OEMs and battery manufacturers to solve their ex-China supply sourcing issue. On Slide 16, the ex-China market size and growth opportunity for Syrah is compelling. Our existing plant and planned production capacities represent only a fraction of the opportunity in the ex-China addressable market and ex-China customers need certainty of future supply now. In 2025, Balama operating at full capacity would represent 42% of ex-China natural graphite demand falling to 18% by 2030 as battery driven demand grows. Vidalia's planned 11,045 tonne capacity represents only 4% and 6% of ex-China anode demand over the same time periods. Importantly, the long development lead times for additional capacities mean that Syrah has a lead time advantage and can excess sales market based pricing as a gap in competing supply materials. The ex-China opportunity and addressable market to normalize over $1.5 billion per annum in natural graphite and expected to exceed $4.5 billion per annum in anode material by 2030. On the next slide, the most impactful strategic developments arising from the geopolitical realization in Chinese supply dominance has been extensive government support for ex-China development, and in response the recent imposition of China export controls and supply into current demand. Government support ex-China is taking multiple forms across jurisdictions, but the most impactful has been financial commitments towards capacity development, something strongly championed by OEMs and battery customers and other stakeholders. Syrah's strong support from the U.S. government under the DOE ATVM loan program, drawing down over $100 million of funding for the Vidalia's current expansion and more recently, the advancement of DFC funding for a potential $150 million for Balama demonstrate the result of the U.S. and align governments to open and champion alternative sources of critical minerals supply. On the next slide, Syrah is therefore the first and most substantial vertically integrated natural graphite supply option outside China and will be critical to supporting other anode material capacity development. Our strategy to develop our own additional anode material capacity will be customer led with further expansion options in the U.S. and development opportunity in Europe and Asia. Steve, will now take you through Syrah’s planned market exposure and Balama asset position.

Stephen Wells: Thanks very much, Shaun. Moving to Slide 19, we see the most important shift in exposure and value for Syrah, namely geographic diversification in Balama's natural graphite sales to active anode material and battery markets from 2024 and 2025 in particular, through sales of Balama material to developing AAM facilities in the U.S, South Korea, Europe and Indonesia amongst others. Syrah is targeting well above a 100,000 tonnes per annum Balama fine sales to third party active anode material customer’s ex-China from late 2025 and into 2026. With fine volumes into Vidalia, we expect it to be around 75,000 tonnes to expand the Vidalia plant by a similar time and overall demand growth requiring increased supply, pricing tension for China and ex-China natural graphite sales will definitively improve. Natural graphite supply to China will remain a key market for Balama material in the short-term and importantly Chinese active anode material producers are rapidly developing ex-China capacity often in JV in order to seek compliance for sales in ex-China markets. Balama supply is critical to their positioning with ex-China customers on this front. On Slide 20, this supply diversification objective is delivered through an upstream position without peer. Balama is the world's premier graphite resource and operation with a cut-off grade above many competing project development reserve grades. Balama's quality differential is material. The limited pipeline of new ex-China supply underpinned by largely inferior resource characteristics compared with Balama and the differential of Balama's operating cost position will become clear as capacity utilization increases. Our first core high position with OpEx around $350 to $390 per tonne when operating at capacity. It takes time, funding, expertise and resources to develop new mines as well as customer qualification material. All of these are ahead of the many graphite projects being developed. Turning to Slide 21. This slide demonstrates that Syrah has massive advantages over new graphite projects with lower capacity and capital intensity for expansion and lower operating costs and proven high production capacity. The biggest risk for developers is simply that plant CapEx, OpEx and performance does not meet expectations and that estimates have been too optimistic. Syrah's enterprise value relative to contain resource is the lowest amongst peers demonstrating significant upside as price and performance improvement is demonstrated, knowing also the development projects have very significant future capital requirements to source in an enormously challenging funding environment. And on Slide 22, the capital invested and the team developed at Balama and the deep operating experience built is a huge value as we move ahead. Our assets are first class and maintaining market access is important to continuing to build this position. I'll now pass you back to, Shaun.

Shaun Verner: Thanks, Stephen. Moving to Slide 23. Vidalia is the cornerstone of Syrah's downstream business and after more than six years of U.S. development is expected to deliver qualified product sales revenue and the platform future expansion through the course of this year. We've developed mutually beneficial customer relationships to bring further uptake to the call shortly, we've focused on long-term market based pricing to bring forth the development value against the almost $300 million of total anode material development and investment already done, notably when nobody else is really doing so. FID for an expansion at Vidalia and other options including Europe will be customer offtake and funding driven ensuring customers pull through as the key driver for investment decisions. On Slide 24, while higher product pricing is required to induce ex-China anode supply, Syrah's predating project has been established to be competitive on a conservative experience based cost build up and sensible pricing assumptions. Should the pricing required to induce many independent projects come to pass, there's significant upside margin opportunity for Syrah. The adoption of market based pricing mechanisms in new offtake ensures that value would flow through in-line with changes in the supply demand balance. Our Phase 1 operations since 2018 and the Vidalia Phase 2 project is now coming into production, given Syrah very strong insight into the requirements, successful development and expertise in both construction and operations. We will continue to leverage this experience into future capacity expansion. On Slide 25, Syrah's integrated Balama and Vidalia ESG and emissions intensity position is strongly differentiated from existing production in China, demonstrating less than half the average global warming potential of benchmark Chinese natural graphite anode material operations and around 70% less than Chinese artificial graphite anode material operations. Put simply, using Vidalia anode material reduces emissions intensity in the area of the battery cell that contributes most to global warming potential of lithium-ion batteries. Syrah's sustainability development, this call to the way we operate provides deep auditability that Chinese producers simply do not provide and our quarterly sustainability external reporting gives great insight to customers that the process is being followed to see continuous improvement focus in these fronts. So, on Slide 26, Syrah's incumbent position can embed key advantages at the time of major global market upheaval. There are huge opportunities inherent in the position. A rapidly expanding customer base in ex-China anode material, along with the existing China base requiring higher volume of natural graphite supply, we'll see a transition to higher average margin for line of sales. Ex-China battery manufacturers and automakers require certainty and secure long-term volume for ex-China anode materials line, meaning that Syrah has a clear lead time advantage in building ex-China anode materials sales book. At a time when stakeholders and customers are motivated to underpin further expansion, our production capability and supply palpitation (ph) see customer driven contracting perverting collaboration on product characteristics and government funding commitment to Syrah's success. On Slide 27, our planned milestones for 2024 will accelerate our development and de-risk strategy. The catalysts ahead include starting production in commercial sales later in the year from our Vidalia facility, further offtake agreements for Vidalia, Balama natural graphite offtake contracts with ex-China anode material customers, progression of the U.S. DFC funding for Balama, progress on U.S. DOE loan funding for the Vidalia further expansion project and importantly in the near-term decisions on balancing China demand and Balama production. And lastly, of course, we'll continue to progress toward FID on the Vidalia further expansion project in-line with other progress in customer and funding commitments. To conclude on Slide 28, Syrah's value proposition is clearly focused on generating shareholder value through the Balama and Vidalia assets. Recent years have been extremely challenging for shareholders and stakeholders with many market disruptions and now Chinese government intervention in the anode material and graphite markets. The company's focus has always been on the preservation of control of assets, generation of funding options wherever possible to minimize dilution and continuing to progress development. With the support of the U.S. DOE and DFC, our Mozambican stakeholders, our shareholders and increasingly ex-China customers, we're pursuing ahead multiple years of high margin market driven benefit as ex-China anode material capacity growth and the need for Balama volume growth and Vidalia's continuing development provides opportunity into a very strong U.S. demand environment for IRA compliant and Non-foreign entity of concerned products. Our operating, marketing and corporate teams remain singularly focused on generating its values for our shareholders to spot the challenging conditions. And with that, we’ll pass you to Q&A.

Operator: Thank you. [Operator Instructions] The first question today comes from Mark Fichera from Foster Stockbroking. Please go ahead.

Mark Fichera: Yes. Hi, guys. Yes. Just a couple of questions from me. I guess, firstly, on the ex-China anode projects globally that you're looking to obviously, do an offtake agreement for Balama with. In terms of, the type of customers that you're looking at, are they both new entrants and incumbents in the anode space? And also secondly, in your discussions with them, do you think you can get a premium for your Balama supply being outside of China in terms of graphite supply? Thanks.

Shaun Verner: Thanks, Mark. Yes, look obviously the ex-China anode material project base has expanded significantly over the last couple of years. Firstly, there are a number of projects from new entrants into the market, some from adjacent industries with experience in these areas, but more recently the changes and challenges with regard to the dominance of Chinese supply, the export restrictions and the foreign entity are concerned in IRA implementation from the U.S. has seen a number of incumbent players interestingly both ex-China and Chinese players looking to expand overseas now. There are a range of projects across the U.S, Korea, India, Indonesia and Europe. And it's been important for us to be engaged with all of those potential players. Obviously, those with incumbent production have the fastest path to large scale development and potentially also the largest initial volume requirements. So, that's certainly been a focus. The interesting thing as I mentioned is the fact that a number of Chinese anode material producers seeking to build or have projects underway outside China and in conjunction with the foreign entity of concern guidelines implemented by the U.S. are looking at the ownership structures for those plants to potentially make themselves eligible for delivery under foreign entity of concern in various incentive programs. So, there is a lot happening on that front. The intensity of interaction around that has just lifted hugely through the last quarter with the announcement of the Chinese export licensing processes. And as I said during the course of the presentation, we expect to make some further announcements on that soon. With regard to pricing, obviously, the pricing dynamic for ex-China material is different from the pricing inside China, both from a freight differential and also competing via available alternative supply perspective. So, we're seeking to obviously bring those market dynamics into those uptake discussions.

Mark Fichera: Okay, great. Thanks.

Operator: Thank you. [Operator Instructions] The next question comes from Dim Ariyasinghe from UBS. Please go ahead.

Dim Ariyasinghe: Thanks, guys. Thanks for the update. Just a couple of questions. So, first on price and in relation to the China export controls. I mean, when the news came out, and so it is probably appeared net positive to Syrah, but the price hasn't gone continues to go away from you. Can you maybe summarize, why that is and whether you expect maybe a short potential further downside from here?

Shaun Verner: Thanks, Dim. So, it's two fold answers to that question. The first is what happened in the very short term after the announcement and prior to the implementation, so Chinese suppliers of natural graphite, spherical, graphite and anode material and their customers outside China sought to move as much material from China to those export markets as possible through a few days of October and into November before the implementation of the controls from the first of December. And what that meant was three to four times the volume of those products coming out of China in November and flowing obviously into those markets in December. And then secondly, the slow and as yet undefined intent around implementation of export permits or export licenses has meant that Chinese spherical producers and anode material producers have been cautious about rebuilding inventory and import orders until they get greater certainty around exports. And that goes for domestic consumption as well. So, the transaction volume in this market in the last couple of months, it's been far lower, and some pricing has been driven in our view by liquidation of stocks from some producers in China who just needed cash flow through this period. In terms of way to from here, the demand of spherical and anode material producers in China for import material from Balama is very closely linked to what Chinese authorities do around export permits. The positives from our side, I think, are that inventory has been drawn down in China and processes have not necessarily rebuilt stocks because they don't have visibility on the potential for their export orders, and that's occurred at a time when China is in its seasonal low period for domestic natural graphite production. So, we don't believe that there is a significant amount of stock build, and we believe that as permits are granted and as spherical and anode producers get greater visibility on their ability to export that orders will increase from there. Obviously, price is going to be driven by that balance of domestic and import supply, but as I said during the call, we just don't see the current prices are going to induce return from seasonal production for natural graphite producers in China.

Dim Ariyasinghe: Awesome. Thanks. And maybe another question, maybe to Steve, just on the DFC loan, could you remind us what -- is there any covenants attached to that? And I guess, what the cash can be spent on, whether it's just a blank check or there are strict nothing blank checks that strict limits on, what it can be useful?

Stephen Wells: Yes. So, there's couple of uses of proceeds, Dim, it's a $150 million loan and $50 million of that is actually available in a number of years relating to when we expect to develop the next TSF, so that’s not really important capital expenditure item for us over the course of that, over the course of the loan. The remaining amount has used the proceeds around existing TSF spend, working capital and sustaining capital, and also potential development of the vanadium resource. So, very much set up for a period like this, where we potentially have working capital and sustaining capital, cash outflows through a period of low production. It's sort of a standard sort of corporate and project finance loan for business in this sort of position, so there are obviously covenants around it. And that's sort of some of the stuff that we're working through in terms of the loan documentation.

Dim Ariyasinghe: Okay, cool. Thanks.

Operator: Thank you. [Operator Instructions] The next question comes from Ben Lyons from Jarden Securities Limited. Please go ahead.

Ben Lyons: Thank you. Good morning, Shaun, everybody on the call. Shaun, you placed some appropriate emphasis on the cost curve for both natural and synthetic graphite during your opening comment, and how that relates to the current pricing environment. You also alluded to some seasonal influences on the supply side in China. But to see a meaningful improvement in the price for this commodity, is it fair that we need to see some structural supply responses? And are you seeing any early signs of a structural response from either the natural or synthetic graphite supply side in China? Thanks.

Shaun Verner: Thanks, Ben. Yes, let me start with the synthetic side. I mean, I think as we've discussed previously, the sort of major increase in production capacity that has been built in China in artificial graphite anode material over the last couple of years has outrun the demand for that product and what that has seen is just an extremely visual domestic pricing and market share low, particularly in the low and medium density segments of that market. And talking to the major anode material manufacturers in China, particularly those that are present in both the synthetic and natural graphite anode material segments, they absolutely expect that rationalization must occur. And at the moment, we have a strong view that the artificial graphite cost curve itself hasn't materially changed, given the primary drivers of power cost and input materials haven't changed. There's been some economy of scale in size of facilities. And therefore, the decline in price has been primarily driven by this competition dynamic. And therefore, some rationalization has to occur. In terms of is that occurring, I think the main thing that we see at the moment is very low levels of utilization for a number of those new entrants and that's putting enormous pressure on their ability to continue to operate. In terms of the natural graphite site, absolutely current prices have seen reduction of the number of natural graphite mines outside of the seasonal production, and where it's been most evident has been in spherical graphite processing capacity, where the anode material producers buying spherical graphite, running tenders admit that quite a number of spherical processes have just not participated in those tenders given the low prices for spherical graphite at the moment and have either reduced or shuttered their capacity. Now, the important thing, of course is, what is all that mean in the long-term, does price improvement see some of that capacity come back online. And certainly, the spherical graphite processing capacity coming back online is necessary for us to see a material increase in demand. But I think probably the most important issue that we are seeing is that development of ex-China anode material capacity driving new source of demand and driving demand for source of material that does not come from the Chinese supply base. And on that basis, it's a fundamentally different question as to what supply is available with Balama being by far the largest and most appropriate source of supply.

Ben Lyons: Great. Thank you very much for the very comprehensive response, Shaun.

Operator: Thank you. The next question comes from Andrew Harrington from Petra Capital. Please go ahead.

Andrew Harrington: Good morning, gents. Thank you very much for your time. Referring to Slide 15, you'll be talking a lot about ex-China demand, and you're saying that in next year, in 2025, there's 700,000 tonnes of demand required from natural graphite, for active anode material outside of China. Where is that demand? Is that -- and does that include your own demand and say, Talendis demand and Mooverne's (ph) demand, which is effectively self-supplied. Look, out of those plants, who else is going to be demanding material?

Shaun Verner: So that demand requirement is very much driven by battery manufacturing capacity, development and operation outside of China. So all of the battery manufacturing plant operations and expansions in Europe, U.S., Asia, etcetera, the source of demand outside China, ex-China demand sources for anode material and particularly in the U.S., the preference there would clearly be for foreign entity of concern or IRA compliant anode material supply. I think it's important to recognize that there is no scenario under which ex-China anode material operations can supply all of that ex-China demand in the short-term because those facilities, just haven't that capacity facilities just haven't been developed. So if ex-Chinese battery manufacturing capacity is to be utilized. It will require some degree or a significant portion of supply from China and that's why this question of how China implements these export license controls is so significant, because without increasing supply ex-China through the development of new facilities and without ongoing supply of anode material from China, the ex-China battery manufacturing capacity simply will not be able to produce the battery that they need for EV growth.

Andrew Harrington: So I guess that's a derivation of the battery, still need to sell the material to China to make the PSG?

Shaun Verner: Yes. So, there's no doubt both of those things need to happen, because in the short-term, China will still be the dominant supplier of both natural and artificial graphite anode material and therefore, it will be a market that imports natural graphite material. But secondly, for ex-China battery manufacturing capacity, they have to grow the proportion of anode materials that's being sourced ex-China, if they're going to comply with foreign entity of concern and various incentive programs.

Andrew Harrington: And if I may, a second question in terms of that bifurcation, if China is a world onto itself in terms of pricing, oversupply in China will mean lower prices, but doesn't mean that anybody else outside China can get it at those prices. Are you working on a way to have a price marker that indicates East Africa price or something like that, so that it reflects the fact that you need any indicator that is for the rest of the world?

Shaun Verner: Yes, absolutely. At the moment, the China market is the price determinant both domestic consumption and export, but clearly as additional anode material facilities demand natural graphite outside China and battery manufacturing facilities demand anode material from sources outside China. There will be reporting in indices that develop, which reflect the supply demand dynamics in different regions. So, we absolutely expect that to happen, and we are actively involved in making sure that the price reporters have information which enables them to start building that view.

Andrew Harrington: Thank you very much. That's great.

Operator: Thank you. The next question comes from John Standingford, Private Investor. Please go ahead.

John Standingford: Thank you. I'm unclear as to whether natural graphite and synthetic graphite direct competitors or are they quite separate markets?

Shaun Verner: No. There is clearly a degree of substitutability in the anode, but there are different quality specifications that natural and artificial graphite anode material are stronger in. So, the vast majority of anode material is a blend of natural and artificial graphite products, and that blend historically in the last couple of years, it's been around 60% artificial, 40% natural. In China, at the moment, clearly, price driven substitution has pushed that blend further in favor of artificial graphite, but ex-China, the blend ratio appears to be similar to what it's been historically because ex-China producers have not sought to access new entrants where there's potential quality challenges around some of this lower priced artificial graphite. But in short, there is substitutability on some parameters, but natural and artificial graphite are both used in blends in an open tiering (ph).

Operator: Thank you. The next question comes from James Wright from Shaw and Partners. Please go ahead.

James Wright: Hi, Shaun. Good morning. Just when do you anticipate first Vidalia product will be delivered to Tesla? Thanks.

Shaun Verner: So, obviously, first production out of Vidalia, something that we expect to happen imminently. The first focus on production from Vidalia is around samples required for the ongoing qualification processes for Tesla and as soon as we have material on specification, that material will go straight into Tesla.

James Wright: Appreciate it. Thank you.

Operator: Thank you. At this time, we're showing no further questions. I'll hand the conference back to Shaun for closing remarks.

Shaun Verner: Thanks to everyone for participation and interest today. Clearly, a time our people in this market, and we remain extraordinarily focused on navigating what is a challenging path. We look forward to keeping everyone updated. Thank you very much for your participation.