IGO Limited (IGO) Earnings Call Transcript
August 31, 2021
Earnings Call Speaker Segments
Thank you for standing by, and welcome to the IGO Limited FY '21 Financial Results Webcast. [Operator Instructions] I would now like to hand the conference over to Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining our call this morning as we present IGO's audited financial results for the 2021 financial year, which we released to the ASX this morning. Joining me on the call today are Scott Steinkrug, our Chief Financial Officer; and Matt Dusci, our Chief Operating Officer, both of whom will be available to answer questions during the Q&A session at the end of the call. Slide 2 highlights our cautionary statement and disclaimer. Of note, all currency amounts in the presentation today are in Australian dollars unless otherwise noted. I also note the ASX releases by IGO and Western Areas on the 19th of August regarding early-stage discussions between the 2 parties. Given the preliminary stage of these discussions, we will not be making any comments regarding such discussions during today's conference call. Moving to Slide 3. In FY '21, we completed 2 strategic transactions to transform our business with a transformed outlook and portfolio from which we can continue to grow and deliver returns to shareholders. In parallel, we have continued our transformation journey to build a strong culture and embed a genuine approach to environmental, social and governance matters into all aspects of our business. Moving to Slide 4. The transformation I speak of did not happen by chance nor did it happen overnight. We identified the opportunity several years ago to pivot our business to the emerging trend towards metals critical to clean energy and give our people a greater sense of purpose in what they were doing. Since then, we have restructured the portfolio through the sale of a number of non-core assets and have aligned our exploration strategy and portfolio towards clean energy metals. The transactions we completed in FY '21 complete the evolution, with IGO now 100% focused on those metals which we believe will be the biggest beneficiaries of the widespread adoption of renewable energy, energy storage and, of course, electric vehicles. Our current focus is on nickel, copper, cobalt and lithium, and our intention is to remain diversified across this suite of metals as we seek future organic and inorganic growth opportunities. Moving to Slide 5. This focus on a diversified suite of products is a core plank in our strategy, which is underpinned by our purpose of making a difference. Our aspiration is to be a globally relevant supplier of products that are critical to clean energy in order to create a better planet. We do this by delivering a suite of products made safely, ethically, sustainably and reliably by being customer-focused and connecting with our end users of our products through vertical integration and by committing to carbon neutrality across our business. All of this is delivered by our greatest asset: our people, people who are bold, passionate, fearless and fun, a smarter, kinder, more innovative team. Moving to Slide 6, where we set out some of the outstanding operating and financial highlights from FY '21, of which there were many. At Nova, metal production and cash costs were all better than guidance, capping off another highly successful year for the Nova team. From a corporate perspective, we announced and completed the transaction to invest into a new joint venture with Tianqi, delivering world-class lithium exposure to our portfolio. In parallel, we successfully divested our stake in the Tropicana gold mine to Regis Resources to complete our transition to become 100% focused on clean energy metals. The Tropicana sale also allowed us to complete the Tianqi transaction without the need to draw on any debt facilities. As a result of the outstanding operational performance at Nova, we delivered outstanding financial performance for the year with record results across all key metrics. Group revenue and other income of $919 million generated an underlying EBITDA result of $475 million, which represents an EBITDA margin of 52%. Net profit after tax was up significantly year-on-year to $549 million, with this result including the gain on sale of Tropicana. Normalizing for this gain, net profit after tax was still a record result at $164 million. Year-end cash was $529 million with no debt. Moving to Slide 7, where we show the consistently strong financial results that IGO has delivered over the last 6 years. Our enduring focus on operational excellence, cost control and prudent capital management has led to record results across revenue, net profit after tax and underlying free cash flow in FY '21, as well as the strongest balance sheet IGO has had in its history. Moving to Slide 8, where we provide a waterfall to reconcile the year-on-year change in our cash position during what has been a very active year. Of note, we highlight $749 million received via the capital raising we announced in December 2020 to support the Tianqi transaction; $906 million received from the sale of investments, most of which is attributable to the Tropicana divestment, which we completed in May 2021; and of course, the circa $1.8 billion payment to Tianqi in consideration for the new lithium joint venture paid at year-end on the 30th of June. Finishing the year with such a strong balance sheet, having completed 2 major transactions during the year is a fantastic outcome and provides us with the platform to continue to grow the business and deliver consistent cash returns to shareholders. Moving to Slide 9. I'm therefore pleased to report that the Board has declared a $0.10 per share fully franked final dividend for FY '21, which will be payable on the 23rd of September. While the Board retains discretion around future dividend payments, we do expect to continue to pay dividends and also expect to accumulate franking credits, which will be available for distribution to shareholders. Following the completion of the Tianqi transaction, the Board has reviewed our shareholder returns policy. Going forward, we will target cash returns to shareholders equivalent to 15% to 25% of underlying free cash flow with Board discretion to return more than 25% of underlying free cash flow when group liquidity exceeds $500 million. We believe this policy provides a good balance of cash returns to shareholders and allocation of capital to fund future organic and inorganic growth. Moving to Slide 10, where I will briefly summarize performance at Nova for the year. As mentioned earlier, our team at Nova delivered another outstanding result for FY '21 with production better than the top end of guidance for all metals and cash costs much better than our guidance range as set out on this slide. As a result and assisted by higher metal prices during the year, Nova generated $436 million of underlying EBITDA and $393 million of underlying free cash flow for the year with EBITDA and free cash flow margins increasing year-on-year. Moving to Slide 11, where we illustrate Nova's performance over the course of the year with consistent metal production and decreasing cash costs. On the right-hand side chart, we demonstrate the increasing financial contribution Nova has made to the IGO business since commercial production began back in FY '18. Over this 4-year period, Nova has generated just under $1.1 billion of free cash flow. Moving to Slide 12, where we set out our production and cost guidance for Nova for FY '22 as well as our directional guidance through to FY '24. As we discussed this guidance during the June quarterly results presentation, I do not intend to talk to this slide in detail. However, I do note that in FY '22, we are transitioning to mining and processing run-of-mine grades that are more consistent with the average reserve grade, resulting in lower production and higher costs than we have seen from Nova to date. Turning to Slide 13. We divested Tropicana to Regis Resources for $889 million in FY '21, concluding a highly successful partnership with AngloGold Ashanti over nearly 20 years. To the right of this slide, we detail the production and cost performance from Tropicana to IGO's account for FY '21. The approximate 100,000 ounces of gold sold to IGO's account at an all-in sustaining cost of AUD 1,720 per ounce contributed approximately $122 million of underlying EBITDA and $68 million of free cash flow to IGO during FY '21. Tropicana is a great asset, and we wish Regis and AngloGold Ashanti all the best for their future partnership. Moving to Slide 14 and our lithium joint venture with Tianqi. The transaction to form a global lithium joint venture with Tianqi was a key milestone for IGO in FY '21. Since completing the transaction on the 30th of June, the JV partners have progressed the commissioning of the first lithium hydroxide train, Train 1, at Kwinana, which produced its first lithium hydroxide a few weeks ago. While this is just the first step in the commissioning process, it is nonetheless an important milestone being the first lithium hydroxide produced from an Australian downstream facility. We look forward to further progressing commissioning over coming months before first production of battery-grade lithium hydroxide expected in the March 2022 quarter to then be followed by customer accreditation. At Greenbushes, work on the ramp-up of production from the second concentrator, CGP2, continues. In parallel, the construction of the tailings retreatment project is being progressed with commissioning expected to commence in early 2022. Moving to Slide 15. Exploration and discovery remains a core pillar of our business and a key driver of potential transformative growth and value into the future. Our commitment over several years has resulted in IGO holding some of the largest and most prospective land positions in Australia for nickel and copper discovery, and our best-in-class team is using the latest technology to maximize our chance of success. To back our conviction, we have budgeted $65 million for exploration and discovery in FY '22, with the bulk of this spend earmarked for our Fraser Range project, specifically near Nova where we are on the hunt for the next Nova. We have also allocated an increased spend to our Paterson projects where we are hunting for sediment-hosted copper deposits in an underexplored geological setting, which hosts Telfer, Havieron, Nifty and Winu. Turning to Slide 16. Sustainability and ESG are embedded in our purpose and our strategy and are interwoven into our business activities. We released our 2021 Sustainability Report today, which transparently report our sustainability performance and practices. This is our seventh sustainability report. And as we have done in prior years, we are pleased to report that once again, we have delivered continuous improvement in what we have done and how we have reported it. Our past sustainability practices and reporting has achieved external recognition, including being included in the Dow Jones Sustainability Index and being a member of the S&P Global Sustainability Yearbook for 2021. This is great recognition for everything we do to minimize the impact of our business on the environment, our communities and our people. Moving to Slide 17, where I discuss our response to climate change. IGO believes we have a responsibility to play our part in the global effort to reduce carbon emissions and reverse the trend of climate change. To that end, over recent years, IGO has implemented several projects to reduce our emissions, including the solar farm at Nova. In FY '22, we will accelerate our response. Key to this will be the adoption of an internal carbon price for our operations, which will be used to fund the internal programs to reduce and/or offset our carbon footprint. Emissions reduction projects will primarily focus on programs to reduce our Scope 1 and 2 emissions while we also work to improve our understanding of our full carbon footprint, including our controllable Scope 3 emissions. Our comprehensive plan is outlined in our sustainability report, and I look forward to speaking to this further throughout FY '22. Moving to Slide 18. Before opening the line to questions, I will summarize our focus for FY '22. As I said earlier, our aspiration is to leverage the strength of our portfolio, balance sheet, people and approach to sustainability to grow the business to become a globally relevant supplier of products critical to clean energy to create a better planet. Over the coming 12 months, our priorities include: execute on the significant brownfields growth opportunities within the lithium joint venture to meet the incredibly strong demand for lithium products; maintain our focus on delivery of operational excellence at Nova; continue our commitment to exploration and discovery to find the mines of the future and deliver transformative growth and value for shareholders, actively consider inorganic growth opportunities while being disciplined in execution to ensure value accretion for IGO and our shareholders; invest in our people and our culture to make IGO the highlight of their careers; and accelerate our response to climate change. Thank you, everyone, for joining us on the call this morning. We will now take questions. Thank you, operator.
[Operator Instructions] The first question today comes from Rahul Anand from Morgan Stanley.
Look, 2 questions. First, Peter, on the new dividend policy, if I may, please. So firstly, liquidity, how do you define it? Obviously, currently, there's no debt. So I assume it's a cash balance above the $500 million that gets the extra dividend. However, when you do have debt, is liquidity net debt? Or is that cash less near-term interest payments? Or is that something else? That's the first...
We think of the liquidity simplistically as cash and cash equivalents.
Okay. And once you have a debt balance, would that make it net cash and net cash balance or...
No. We would -- we'll still stick to a cash and cash equivalents formula.
Okay. Perfect. That's helpful. And then the $500 million number, can we expect all the cash that goes above the $500 million to go in for consideration from the Board? Or would you also start taking into account some of the CapEx requirements that might follow in future financial years, i.e., I'm thinking about perhaps when you're developing Silver Knight or otherwise?
Yes. We'll always be mindful of what our CapEx requirements are, and that remains a key plank of our capital allocation framework. And like if we look -- think about FY '22, for example, we've got a circa $30 million, $40 million contribution into the lithium JV. We've got an approximate $170 million tax bill in December '21. We've got a $45 million payment approximately for Silver Knight most likely at the early part of the December quarter. And we take some of these sort of looming expenditures into account when the Board exercised its discretion. And so if you think about those examples in FY '22, then you can think about some of the situations in future years.
Got you. Okay. Perfect. That's helpful. And then final question, I understand and you did mention you don't want to talk about the WSA discussions at this point, which is very understandable. But I guess in terms of the M&A strategy, having transformed the business as significantly as you have, does this perhaps give you an opportunity to define your targets a bit more and provide a bit more detail to us. Perhaps if you're looking at specific parts of the chain, I mean early-stage assets currently producing assets, do you still remain focused on Australia? Have you had some time to perhaps start considering some of these?
Yes. I think I would -- what I would have talked to in the June quarterly conference call is probably a tilt towards our operating stage assets if we were to consider M&A. And that's largely driven by the fact that we have a lot of development activity embedded in the business via the lithium joint venture. And when -- at various times when we've talked about the lithium joint venture, we've talked about the build of the tailings retreatment plant at Greenbushes. We've talked to the CGP3, the third concentrator. We've talked to our CGP4, the fourth concentrator. And when we think about Kwinana, we're commissioning Train 1. We've got a pending a recommencement of construction on Train 2. And then we've articulated an aspiration to Train 3 and 4 in the future. So there's a lot of development activity there. And then that conditions are our approach to M&A and a greater focus on operating assets, but we wouldn't rule out the right development stage opportunity. And our role is to look widely but be disciplined in our execution.
Okay. And still the focus on Australia then?
Right now, today, being pragmatic, it's really difficult to do boots on the ground M&A anywhere else. And so that conditions what we do in the near- to medium-term.
The next question comes from Daniel Morgan from Barrenjoey.
Just wondering with the policy, why do you have $500 million as a liquidity buffer? If you have a great M&A opportunity to pursue, why not come to the market, convince them to fund it like you just did with the lithium acquisition, which, I think it's safe to say, was overwhelmingly endorsed and supported.
The -- it was really to be able to give people some guidance that the Board was going to use a high degree of flexibility depending on how much cash is in the business and to demonstrate to people that we were going to operate outside that 15% to 25% of free cash flow guideline whenever there was significant liquidity in the business. And we felt that that's more meaningful guidance to shareholders than simply to quote the one metric being the 15% to 25% of free cash flow.
Okay. But with $500 million as a buffer, it sounds like you want to always have a net cash position. I'm just trying to understand why you don't maybe come to the market for funding if you need to.
Dan, look, it's Scott here. I would add to that. That $500 million, we would assess that at the end of December, the end of the half year. At the end of the financial year, we would then make a dividend payment, which would then foresee we bring the cash balance below that $500 million. So we're not talking about maintaining a cash buffer at all times above $500 million.
Right. Okay. And then on Slide 12, where you give 3-year guidance on Nova, you referenced consensus pricing and coming up with the unit cost, which obviously copper and cobalt is key there. Can you just share what you've got in there as there can be some variability if you look at different places for consensus?
Yes. Dan, we took a look at that. So these -- the guidance is about 24,000 to 26,000 tonnes of nickel, and copper pricing on average is about AUD 4.40 per payable pound, and cobalt is maintained at around $29 and $30 per payable pound in that guidance.
And we did set out those in the more detailed disclosure we provided in the June quarterly results with our guidance. We've itemized all of those by-product credit pricing that we have used.
Yes. FY '22 was $5.22, I think, per payable pound for copper and relatively flat for cobalt.
Okay. And just wondering on the lithium business, I appreciate an update is coming in the September quarter. But can you provide maybe some high-level thoughts on the business? Since you've acquired, is there anything that surprised you? And how are you interacting with your JV partners?
In short, no, there's no surprises, and the relationships are panning out as we expected, with the lithium joint venture taking us a little bit of time to embed in the core management team for the lithium joint venture. And as you will recollect from our announcement in December 2020, where there's 3 key persons identified, the CEO, the COO and the CFO, with Tianqi appointing the CEO and the COO. So we got the CEO in store. That's an appointee from Tianqi in China over the last 2 months. And we also have earmarked our CFO into the role. During the last 2 months, our nominee into the CFO role has done -- has been largely embedded still in the IGO business as we completed our annual financials, and then he'll be moving across to the lithium JV front with effect from tomorrow, 1st of September. And we expect that with all of the team embedded, we'll then be able to progress some of the work that needs to be done that gives both ourselves and Tianqi the confidence that we need to then be able to talk to some of that forward-looking guidance going forward.
Okay. And just last question on that. I mean the first lithium hydroxide plant, well publicized, has been over budget. It's not been a great project. It's had a few issues. What is your confidence that future trains, the Train 2, et cetera, will be on -- much better managed as projects?
There's a proverb something along the lines of once bitten, twice shy. But certainly, without better understanding of who are the right consultants and contractors to use here in Australia to get a better handle of costings at a design stage and we certainly have capability that we delivered to the joint venture. And then the joint venture is also informed by the mistakes that were made and the learnings that were gained during Train 1, and we'll be taking some of those learnings into the finalization of the construction of Train 2. So when we start talking to detailed numbers on what it's going to cost to complete that construction, most likely around the end of the March quarter, we would be talking to a higher degree of certainty having done the work between now and then to get a high level of confidence around those numbers.
The next question comes from Lyndon Fagan from JPMorgan.
So look, just hoping to revisit the 3-year guidance again but specifically on the costs. It looks like they're going up over 30%. And I just wanted to hopefully get a bit more color on what's driving that. Are we -- and maybe a bit of color on the copper guidance that sort of marries up with the nickel guidance.
Yes. Lyndon, it's Scott. So the -- I mean if you have a look at the guidance range we provided long term, it's about 2 50 to 2 90 and it does go up. And part of that is because of the lower commodity price assumptions for copper and cobalt. That's obviously a factor. Slightly lower nickel production is also a factor. And other than that, we're not expecting too many cost increases above what we factored into FY '22. So look, this is the way we see the numbers coming out then for those 2 years. It's also a system with what we put out last year as well for that long-term guidance.
Yes. That's helpful. And then just over Greenbushes, we've obviously seen some pretty big spodumene prices in the market. Can you maybe remind us whether Greenbushes is achieving those prices today, like $1,200, $1,300 type level, or whether there's a lag on the contracts that we need to think about?
Yes. As we would have talked to before, there is a lag. The price for the current 6-month period is determined by the 3 months that precede the 6 months period. So April, May, June pricing sets the price for this July to December. And then the pricing for the first half of next calendar year will be informed by October, November, December pricing.
So we've got a 6-month rolling contract based on the prior 3 months. Is that right?
It's a 6-month rolling price-setting mechanism based on the 3 months ahead of each sort of 6 monthly period. And that's an internal price because that's the price at which it's transferred from Greenbushes to the lithium joint venture company, then the lithium joint venture company...
Okay. I'll -- I might have to take that one off-line. And just the final question, I'm not sure if you can still hear me, but hoping to go through the lithium growth funding and given the increased prices, whether there are any cash contributions coming up or whether you might be able to revise the budgets there? Yes. I appreciate that. So look, I just was hoping to finish off with one more. So given the bounce in lithium prices, are you able to provide some updated budgets on the potential cash contributions into the lithium JV?
Yes. Absolutely. And our intention is to roll that up into that disclosure in the September quarterly conference call, if not before.
The next question comes from Peter O'Connor from Shaw and Partners.
A bunch of questions, starting with some small nuances. Functional currency and balance date decisions for lithium JV?
Functional currency, [ Peter, I suppose ] we're going to leave it at Aussie dollars for now, and balance date will remain as of financial year-end.
And the JV is a financial -- is that a calendar year-end or what?
I don't think it's -- it doesn't really matter [ whether JV is over ] a calendar year, but we will be picking up our share of profits from the JV monthly, quarterly, et cetera, and just bring that into our end of financial year results, relative half year results.
Okay. With 13 mines gotten ahead of the September quarter, what should we expect in terms of financial data from the JV on a quarterly basis? Will we get a financial [ principal ]? Will it be a dividend number? Will it be an NPAT number? How should we think about modeling and getting at the...
Look, at a minimum, the information that we will be disclosing [ is the payment ] and what the profit contribution mean from the lithium JV as well as any cash dividends that IGO received. And then after this, I mean further disclosures will be coming through then in the September quarterly. I mean aspirationally, we would love to report on a similar basis to the way we've reported Nova in the past and Tropicana in the past.
Okay. And ahead of a tax determination, which you indicated last call was unlikely until calendar year '22, franking and tax payments in the JV? Will the dividends be coming to you franked?
So the position is Greenbushes, we know, is a taxpayer and we'll be then seeing franked dividend through to the lithium JV. And we'll be getting the benefit of those franking credits and then we'll pass those on to the shareholders. What it means is effectively those dividends coming through to us will effectively be tax-free because of the franking credit. That would be [ assessable ] that were unfranked.
Sorry, could you just rewind it? Replay the last part of that.
We have expectations that because Greenbushes is a taxpayer that they have a franking account that they're maintaining and they'll be paying franked dividends to their shareholders, being Albemarle and being the lithium JV. And then those franking credits should pass through then to those shareholders being ourselves. And ultimately, what that means is then that these will be [ non-assessable ] dividends in the hands of IGO after that comes through because of the effect of the franking credits. That will then pass on to shareholders.
Okay. So a straight pass-through?
Yes.
Okay. That's great. And just back to the point about the dividend policy and liquidity. Just to be 100% clear, so you're defining liquidity purely as cash and cash equivalents, so not undrawn credit facilities?
That's correct. So cash at the -- we're not talking about net cash. We're talking about actual cash.
Okay. And when Pete answered regarding how the Board would look at the balance between the cash you have and the requirements ahead, are the Board sitting there with a balanced state at 30 June when they do this but they're 2 months down the track? Or have they got a balance date -- a balance sheet update at that point of the Board meeting? The first part -- second part, is it just 1 year ahead spend that you would take into account when you're balancing that $500 million cash versus capital requirements? Or is it multi-years ahead?
Look, I think we'd take it holistically and have a look at certainly more than 1 year ahead if there's major CapEx ahead of us. But I would make the point though that we're not maintaining a $500 million cash buffer at all times. I think the expectation is that a payment of a dividend. For example, it's $76 million dividend we're paying now, which is a $0.10 final dividend. Other things being equal, that would bring cash below the $500 million limit that we've set out. We've also got $170 million tax payment to make in December. That's going to bring the cash balance well below that $500 million at that point in time.
So just simple modeling, we should look at the balance at either June 30 or 31 deck. If it's give or take $500 million, that's what we figure the spend ahead and make a judgment like you would do about the dividend. Okay.
Yes.
And can I ask about lithium and the hydroxide plant starting up? Pete, ahead of the accreditation process next year, what happens with the product? Do you sell an intermediate product or a low spec product to generate cash? Or do you stockpile that product ahead of accreditation? How does the flow of cost and revenue go at that facility? And when is it declared commercial, reproducing asset?
There are basically 2 phases there, Peter. The first phase is while we're generating off-spec product that can't be sold, so we would expect that from now through to October and November, we'll be on the journey to produce a salable quality product, and that product that's produced during that period just gets recycled in the refinery. And then by the end of November, we would have expected to have achieved a salable quality, and we will be selling that into the general market on a spot basis. And then we'll be on the journey to improve the quality further and deliver a battery grade, which we have said we would expect to achieve during the March 2022 quarter. And at that point, we go through the accreditation process and, once complete, start delivering into our contracts. So anything produced until the point when we start delivering into contracts is just sold into the spot market, which, as you know, is looking quite buoyant.
Yes. The time frame and the steps to achieve accreditation?
You hear all sorts of different guidelines for accreditation, but given that the offtakers have been taking product from Tianqi are produced in China, we expect that it will be a more accelerated accreditation process. And it could be potentially sort of 6 months.
The next question comes from Matthew Frydman from Goldman Sachs.
First question is around your emissions reduction program that you touched on and particularly your internal carbon price. Just interested to hear how that may apply to the lithium JV. What are the targets there? And I guess specifically your end products, you're just talking about the process of accreditation for the lithium hydroxide product. Clearly, some of the production there from Kwinana are potentially earmarked for customers in Europe. We've seen the European draft carbon border adjustment mechanism. Just wondering if you've got any views there on how that could play out for your products or for Kwinana lithium hydroxide. Could we see a premium there for Kwinana when delivering to customers in Europe compared to maybe exports coming out of China? And what's the pathway there for the lithium JV to create a greener product over time?
Yes. Sure. And in short, that's the aspiration to get to that point. Right now today, from an IGO perspective, the lithium JV is a Scope 3 emission that we're already collaborating with a lithium JV to do the body of work to understand what our Scope 1, 2 and 3 emissions are there and to put in place a carbon plan so that we can deliver that aspiration of producing a low-carbon lithium hydroxide to those premium markets in South Korea and Europe.
Great. And do you expect -- or any thoughts there on whether that could achieve a premium, particularly given carbon border adjustments, et cetera?
I think all of those elements, whether it be the quality of the product that you produce, the jurisdiction that it comes from, the carbon footprint it has, whether it's been ethically and sustainably produced generally, whether it's a reliable product, I think all of those contribute to a premium price.
That's great. Thanks for that context, Peter. And then secondly, we can see on the balance sheet there where you recognize the equity interest in the JV. Just wondering if maybe Scott can give any detail on whether that carrying values -- whether there's been any test there that's been applied to the level of provisioning on the JV balance sheet. I mean we know Greenbushes as a mine has been around for quite a while. You've also got a pretty significant chemicals facility in an industrial area just near Perth. So just wondering how -- if any, how any provision test has been applied to that carrying value.
No provisioning applied. All I can say is -- I mean the $1.85 billion, it represents now 49% of the balance sheet then -- and what we paid for the business. But it will be an underlying balance sheet for the lithium holdco then that we will obviously become aware of. In fact, if you go to the financials and Note 25, you'll get a sense of what that underlying balance sheet is. It's at a relatively high level. But what it does, I'll also refer to then is that balance sheet and at 100% comes out at about $1.9 billion. And then when you factor in what it is that we've paid, you've got there's an uplift factor. And that takes that $1.9 billion that our share is $900 million plus about an uplift of $900 million to bring it up to the $1.856 billion that we paid for the investment. Let's spelled out a little -- in more detail in Note 25 of financials.
Thanks, Scott. I'll have a look through that note, but I guess has the -- just wondering if there's been any sort of testing of that underlying JV balance sheet with regards to provisions, whether the provisions that are currently being carried with respect to those assets and rehabilitation, et cetera, has been tested as adequate.
Look, certainly, they've been audited if that's what you mean, and there's a clean balance sheet there as at the end of June. [ Look, our ] balances are also audited. They're a noncurrent asset of the business. For Greenbushes, they're in their -- offhand, I can't tell you what that is at the moment, but it's all washed through effectively into the balance of the investment that we have on our balance sheet.
The next question comes from Kaan Peker from Royal Bank of Canada.
Two questions from me. Just firstly, on the lithium JV, can you talk through how the JV may be able to fast-track the hydroxide acceptance process? Is the process mostly sequential post first production? Peter, I think, mentioned as short as 6 months. And maybe if you can talk to the difference between chemical-grade and battery-grade hydroxide with regard to processing probably key product mix. And I'll circle back to the second question.
The line was a bit -- made it difficult to exactly hit your question there. Do you want to repeat that for me?
Sure. I was just wondering if there was possibility that the JV may be able to fast-track that hydroxide acceptance process and if it was actually a sequential process from first production. And the second part of that first question was around the difference between chemical grade and battery grade with regards to processing key product specs.
Yes. Sure. So on the first one, it's too early for us to comment on that, and we haven't had the direct interactions with the customer to really understand the degree of flex that, that might be achievable. On the second one, my understanding is that the chemical grades are cost -- or it's saleable from about the point where you've got about 90% lithium -- 90% pure lithium hydroxide. Anything above that, we can sell. Anything less than that, we'll be recycling in the refinery.
Sure. And just maybe a second question on nickel. Can you please update us on your view of possible nickel sulfide plant? I know the option was considered in 2019 studies being revised on this.
Yes. Sure. No, we did some really good work back at that time. And what we tried to do was start with a clean sheet of paper to say, well, if you didn't want to produce nickel metal and your aim was to produce nickel sulfide, how would you do it differently? And how would you deliberate a process that had a lower carbon footprint and a lower environmental impact? And we developed what we call the IGO process, which is a sort of one-step process to take nickel sulfide concentrate through to battery-grade nickel sulfide. What we found at that time was the cost of building that in Australia was about -- for the scale or the size it would take all of the Nova product, was about $0.5 billion. And with the mine life that we had at that stage, we didn't have enough mine life to deliver the payback and the return that we would need to commit to the investment. So part of our -- the work we're doing on the Fraser Range to find more nickel is to deliver that long-dated nickel sulfide supply to allow us to go back and relook at that opportunity for nickel downstream in the future, whether that be by ourselves or in collaboration with others. So it's something that sits [ mainly ] on the back burner, bubbling away, but we really need the catalyst around longer-dated nickel sulfide supplier to be able to look at that more aggressively.
The next question comes from Sophie Spartalis from Bank of America.
Just a couple of questions from me. Just to keep going on Kaan's question there, are you able to provide what that life of mine needs to be to get, say, 15% return on that nickel sulfide process?
Yes. We're looking for 10 years of supply.
Okay. And then just in terms of the Nova plant and the 3-year guidance that you provided on the production and also the cost, can you maybe just talk through what initiatives you're working on in terms of productivity or cost initiatives to change that outcome?
Sure. I've got Matt here to talk through that.
Thanks, Sophie. There's a number of work streams that we're looking as part of that improvement to what we see in that 3-year guidance. One of the key drivers there will be Silver Knight. So we're working through the studies now. We're working through that initial study phase to work that out and have an understanding of the inputs. We're comfortable with -- that will be some plant debottlenecking and underground debottlenecking at Nova so that we can continue to drive efficiencies through this 3-year period.
Yes. So the large...
Okay.
When -- to dwell a little bit longer on your question there, Sophie, it also goes back to the question asked earlier about the optics of the increase in the cash cost. The majority of that is driven by the contribution of the metal. So if you have less by-product credits coming in because of lower volumes, that has an impact on the overall cost per payable pound after by-product credits. And of course, with less nickel units available to divide into that, that also impacts the optics of the cash cost per pound. If we go back to real numbers -- and in my mind, real numbers from an operating point of view are how much does it cost dollars per tonne to mine it? How much does it cost dollars per tonne to process it? Our numbers are pretty much flat from FY '21 through FY '24.
Okay. Thanks, Pete, for that color. And then just in terms of Silver Knight, is there any update or key thinking around when you can bring that feed in?
We're in the process of scoping that at the moment, and we would expect to settle the transaction with Mark Creasy or Creasy Group early in the December quarter.
Okay. And then just switching over to lithium, I know you've had a lot of questions on the plant. And it's great to see that, that first lithium hydroxide has been produced there given the troubled history. Are there any more -- I guess can you just walk through any debottlenecking or issues that are remaining to take you through to that time line that you highlighted around producing battery-grade by March '22.
Yes. It's normal a commissioning process, Sophie. So to get the first lithium hydroxide, what we've done is we've hot-commissioned everything on a batch basis. So we've taken a plug of spodumene. We push it through the calciner, produce some calcine material, push that through the acid sulfation [ bay ] and just sort of push that all the way through to the system to the [ bagging ], and that's allowed us to test each part of the process. And then the next step is to start operating everything on a continuous basis. And the aim would be to operate continuously at around 50% of capacity and then progressively improve quality while producing at that rate and with the endgame being producing that first battery-grade product in the March quarter.
The next question comes from Mitch Ryan from Jefferies.
One really simple question. You've called out $33 million exploration spend across Fraser Range. Can you just give a bit more granularity beneath that? How much will be going towards Silver Knight versus Orion versus additional targets?
Yes, certainly. Look, our priorities are driven by where we see the greatest opportunity of success. So going into the budget program, that was very much around Orion and Chimera and some of those names that we've talked to through the last couple of quarters with the agreement with Mark Creasy on Silver Knight. Post the establishment of our budget, we'll be moving some of the pieces around on the chessboard to reallocate some funding to Silver Knight and what we call Silver Knight deeps because quite frankly, Silver Knight deeps would be our #1 target on the Fraser Range once the transaction is finished.
Yes. That's how we manage the capital around that, Mitch. So once we have Silver Knight in the portfolio, we'll rearrange and submit for that as the #1 priority drill program. So roughly around about 65% as it stands now, around about 65% is going towards the south around Nova and then the rest is going up to the north. But again, if Silver Knight is coming to our portfolio, we'll adjust that.
Okay. So you're saying 65% of that $33 million?
Yes. That's 65% of that $33 million.
We'll now move to the webcast questions. Our first webcast question is from [ Paul Philips ]. Paul would like to know, I noticed that the capital allocation framework no longer specifically has an allocation to exploration. Does this reflect a change in the attitude towards exploration spend? How should we think of exploration versus, say, M&A?
Yes. The short answer there is that we do have an enduring commitment to exploration and it still forms an integral part of the capital allocation framework, and that's captured by that item of growth in the orange box.
Thank you. That does conclude the time allotted to the question session. I'll now hand the conference back to Mr. Bradford for closing remarks.
Great. Thank you very much, operator, and thank you, everyone, for participating on our call today. We really appreciate it, and we look forward to engaging with you soon when we deliver the results for the September quarter towards the end of October. So stay safe, and have a good day.
Thank you. That does conclude our event for today. Thank you for your participation.
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