Mineral Resources Ltd

ASX:MIN

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to Mineral Resources Analyst Call covering today's release of its December 2024 Exploration and Mining Activity Report. Your speakers today are Mark Wilson, Chief Financial Officer; Mike Grey, Chief Executive, Mining Services; and Chris Chong, General Manager, Investor Relations.

A bit of admin before we kick off. [Operator Instructions] This call is being recorded with a written transcript being uploaded to the MinRes website later today.

I will now hand over to the MinRes team.

[Mark Wilson, executive]

Thanks, Josh, and good morning, everyone. It's Mark Wilson, MinRes CFO, here. Welcome to the December quarterly conference call, and thank you for your interest in MinRes. I have with me this morning, Mike Grey, our CEO of Mining Services; and Chris Chong, GM of IR, with me. I intend to run through a few highlights first, and then we're happy to take questions at the end.

In terms of our summary of where we are for the quarter and for the half, starting with governance, I'm just going to say upfront that you'll appreciate I can't comment further on governance matters or answer any questions on this subject today.

Moving on to focusing on the highlights from the quarterly. In terms of our liquidity, that's been a key topic of focus for some time. Liquidity remains very strong. We've got $1.5 billion, as of the end of December and sitting in that balance is a fully undrawn $800 million revolving credit facility. Of note, our Onslow Iron carry loan, which is a receivable from MinRes from our JV partners, created as we funded them into the project, has now increased to a touch under $800 million.

This receivables accruing interest at around 7.25% and repaid from 80% of the JV partners' free cash flow. That means that we're effectively reaping over 90% of free cash flow related to the Onslow mining operations for the first few years. Of note, the carry loan has started to be repaid as the mine itself is now generating positive cash flow. I'll talk on that a little bit later.

At 31 December, net debt totaled $1.5 billion -- sorry, $5.1 billion. Major inflows, we received both the $1.1 billion upfront cash from the sale of the 49% stake in the Road and also the initial proceeds of $780 million for the Hancock gas sale were received in the quarter. Both are significant achievements and as I've said previously, demonstrate our ability to realize capital from underappreciated assets.

In terms of major outflows, previously foreshadowed, CapEx was heavily weighted to the first half, came in at about $1.4 billion, largely due to the completion of the major infrastructure for Onslow. There was a working capital impact of around $500 million, primarily to a decrease in trade payables. That wasn't unexpected given CapEx was always going to peak through this half, and we're just seeing an unwind of less payables.

Additionally, in the half, we had the $200 million final payment for Red Hill Iron ore once we got first ore on ship and a further payment -- sorry, a payment of $26 million in relation to the IV, Iron Valley acquisition.

Headline net debt numbers adversely impacted by a $300 million revaluation of our U.S. bonds of about $3 billion. That was a balance date revaluation at an exchange rate of $0.62 compared to the $0.66 was in place at 30 June '24. As you would understand, that's a point-in-time accounting calculation, rather any real adverse impact on the group. We have U.S. dollar earnings that balance that, and the lower AUD is actually welcome for us.

In terms of the bonds, if you haven't checked recently, they continue to trade very well, continue to trade with strong support from our bondholders well above par. And just to reiterate that we have no financial maintenance covenants of any kind on those instruments with the earliest maturity in May '27.

In terms of safety, -- the rolling 12-month TRIFR was 3.83 and the LTIFR was 0.21. The increase in the TRIFR is due to the construction activities and the intense level of work that was going on through the period. We're expecting that number to come down, as construction winds off. And just to reiterate, as I said last time, safety remains our priority, and we know it's important for our people. It's important for who we are as a business and it's important for our clients as well.

In terms of our outlook, we're maintaining volume and cost guidance for all of our continuing operations. We did have higher costs in the first half across a number of the operations, which I foreshadowed on the last call, and I'll talk through that in a little bit. We did also talk back in September of CapEx and OpEx savings, $180 million of CapEx and $120 million of OpEx.

In terms of the OpEx savings, we've made good progress there. We're now up to about 1,200 roles that have left the business across head office and sites since the start of FY '25. That's a considerable increase on where we were at the last call. Those numbers reflect the wind down of the construction activities, the transition of Bald Hill and Yilgarn into care and maintenance, some roster changes as previously foreshadowed with lithium and a commensurate reduction in head office staff. So I'm comfortable where we are on the OpEx.

On the CapEx savings, we have made progress with the CapEx. What I'm going to say on the CapEx is we're going to provide more detail at the half because we're still working through it. When we made that call around the savings that I predated the deal with Hancock, I think that the deal with Hancock gives us a bit more flexibility to think about how we might spend a little bit, particularly on gas. So you might see some more drilling costs, which we -- again, we'll talk about in February, as we work through that.

In terms of moving into the business now, Mining services, production volumes were flat quarter-on-quarter at 68 million tonnes. We did see volumes come up with Onslow and some external work, largely offset by Yilgarn and Bald Hill going into care and maintenance. In terms of guidance, as I said, maintaining guidance, we expect volumes will continue to increase, as Onslow ramps up.

And a point of note on the external environment, I know that's been of interest to our investors. The external environment, the outlook remains positive. We've got good interest with a number of opportunities we're exploring with our key clients. We commenced 2 new external client contracts in the quarter. One was for rehab and one for mining. And we also renewed 4 existing external crushing contracts.

In terms of iron ore, attributable production, iron ore production across the 3 hubs was 8 million tonnes with shipments of 5.2 million. Average quarterly realized price across the 3 hubs was USD 84 a tonne, which was 81% realization. There are a couple of percent attributable to prior period adjustments without those, it would have been around 83%.

In terms of Onslow, so we're pleased with the way Onslow is continuing to progress. The average realized price for Onslow was USD 85 a tonne, which is an 82% realization. Customer feedback has been very positive.

In terms of the operations, as I said earlier, the mine -- while the carry loans are being repaid. The mine itself is -- mining operations are profitable or MineCo is profitable and generating cash and Mining Services continues to generate cash out of that operation. So the operations there are performing, as we would have hoped. We believe we're now at peak leverage with that maxing out of the CapEx spend through the half.

Over the quarter, we produced 4.4 million tonnes, which represents an annualized run rate of 17.6 million tonnes. Just to note that the -- that's done with effectively 2 crushers operating. The third one is in the final throes of commissioning. January production, we are expecting to be at least 1.6 million tonnes, which is a production rate annualized of just over 19 million tonnes. And again, we'll see the benefits of the third crusher really kick in through February and beyond.

Third transhippper started in October, loaded 18 vessels and -- sorry, 3.2 million tonnes shipped over the quarter. January shipments were running at over 18 million tonne run rate before we got hit by severe tropical cyclone Sean. That was a somewhat unusual cyclone in terms of its nature and the direction it took. It basically disrupted transhipping for 8 days, and we have identified the need to do some rectification works to limited sections of the road to repair flood damage caused by the cyclone and a separate recent heavy rail event -- rainfall event, sorry. The amount of water that moves up in that region is quite extraordinary in this instance. And I'm sure Mike can provide further flavor if you have any questions on that.

The third next-gen crusher, the reclaimer, truck load out all commenced commissioning in December. We're very happy with the way each of those is progressing. The transhippers are operating at nameplate capacity. Fourth is scheduled to arrive in February and the fifth is expected in April. The truck unloading circuit, product handling shed, the bridge reclaimer and the transhipper load are all complete and each have demonstrated we can achieve nameplate capacity rates.

I just want to take a moment to talk about the road train rollovers that occurred in the December quarter or in the half actually. There were 4 different incidents between October -- sorry, between August and November. One of these occurred on the haul road and the others occurred on various access roads at the mine around the mine.

Haul road has been operational since late October and there have been no incidents in December or January. All incidents involve some degree of operator error, but notwithstanding this, our response has been intense. We've included a number of operational improvements, strengthening driver training, looking at the road design, making some improvements and improving signage and lane delineation. We feel that we're in a good space there now.

On the other operations for iron ore, Yilgarn and Pilbara Hubs, shipping shipments totaled 3.5 million. Yilgarn, as we flagged, has transitioned to care and maintenance, and we've successfully redeployed over 780 people to other roles within MinRes. We are running a process for a potential sale of the Yilgarn. And if and when we have any updates on that, we'll make an appropriate announcement.

In terms of costs, FOB at the Yilgarn was higher than guidance, primarily because we wrote down some remaining unsold stockpiles. We also had to carry a fair bit of fixed costs through that quarter as we moved into care and maintenance. Pilbara with Iron Valley and Wonmunna, another solid quarter, just ticking over 2.4 million tonnes shipped. Again, some write-down of some stocks, but comfortable with the way those operations are performing.

Moving to lithium, spod production across all 3 sites was 136 dry metric tonnes -- 136,000 dry metric tonnes with shipments of 143,000. Average realized price achieved across all the sites on an SC6 equivalent basis was USD 827, which was a solid performance in a market that we believe is improving, and we've continued to see prices better than that, as we move into this second half.

In terms of Marion, we previously foreshadowed a shift to deliver higher-grade product, which we've executed on and to realign volumes around market conditions. As a result, production decreased to 58,000 tonnes, and we shipped 55,000 tonnes at 4.4%. The underground development, we've taken that to 160 meters vertical depth. We paused at that point. We sold 56,000 tonnes at realized price, SC6 equivalent of $816 a tonne.

As previously foreshadowed, we have implemented a range of cost reduction measures across our lithium operations, including workforce roster changes [ two on one ] mine plan changes. We've seen at Marion 190 people off that site along with a lot of gear. First half FOB costs, again, on an SC6 basis were $1,076. We're maintaining our guidance of $870 to $970. We're already seeing the cost reduction measures flow through towards the back end of the quarter, and those will continue to have an impact through the second half, and we continue to see expected improvements in recoveries, partly because of the introduction of wins, which we've flagged previously.

In terms of Wodgina, production was at 54,000 tonnes, which is up 5% quarter-on-quarter. I talked last time about the challenges we had in the first quarter with the transitional ore and the quality of the material that we were working through. We have seen more fresh ore. We are getting better recoveries in this second period.

We shipped 61,000 tonnes at an average SC6 realized price of USD 834. Similar story on costs. First half FOB SC6 basis, we expect them to be a touch over $1,000, $1,013 or thereabouts. Again, we're maintaining guidance, as we see the impact of those cost reduction measures flow through. We're seeing the cost per tonne decrease. We've seen that through the tail end of the half, and we expect that to continue as production increases.

Bald Hill, as we disclosed a few months ago, that's been placed in care and maintenance given the market conditions, and it's our highest cash operation. We saw shipping decrease, as a result to 27,000 tonnes. We are maintaining the site on the basis that we can turn it on again for a quick restart as needed. So we have 3 months pre and post crusher ore -- stock available and make things a bit easier for us when we need to go when the market moves.

In terms of FOB costs for Bald Hill, they've come in, we expect them to come in about $1,150 or thereabouts for the first half on an SC6 basis, higher than guidance, but again, impacted by the decision to move to care and maintenance and lower associated production. So [ they are ] some introductory comments. Hopefully, that help provide a little bit more context of the numbers that were in the announcement this morning.

With that, I'm going to hand back to Josh to queue for questions. Thanks.

[Operator]

[Operator Instructions] Our first question today comes from Ben Lyons from Jarden Securities. We will move on to our next caller. We have Kate McCutcheon from Citi.

[Kate McCutcheon, analyst]

Just starting at Onslow, how much of that CapEx there is left to spend in 2H now that the infrastructure spend is done? And where is the bottleneck now if you had to call something out given the haul road is done? Is that the crushers? And I guess, confidence in that 35 million tonne per annum rate by the middle of this year, I think it was.

[Mark Wilson, executive]

Good morning, Kate. Thanks for joining and Happy New Year. It seems like a long time ago. Going backwards on the questions. The -- in terms of the bottleneck, I think we've shown that we've got at the front end, the capacity with our production volumes to deliver at the sort of targeted rates. On the road, we've been operating on the road since October. We've had to rely on some contractors with haulage, with lower capacity to assist us through that ramp period a little bit longer than we would have liked. The road was working well.

And in December, we actually had more challenges at the port end with reclaimer and the shed just doing a few things that shouldn't have been doing, where we were ramping up. We've got those largely sorted now. And now we're actually just working through the impact of the cyclone and the storm and just a little bit of work on the road. So we're constantly juggling all the different components.

As we said, the transhippers, we're very happy with the way that they're performing. In terms of the cyclone, as I said, that was 8 days, which generally, we budgeted for 4 days in our planning for a cyclone loss. The track of this cyclone meant that it was a little bit different. So there have been little bits and pieces we've been wrestling with along the way each month, different points along the supply chain. But as I said in my comments, we've demonstrated each component on the projects capable of hitting that nameplate rate.

In terms of the CapEx that's left to go, we've got mine development costs to start to open up other areas, which we've got scheduled for first half FY '26. That's as we push into other regions and start to get ahead of it so that we can maintain the production rates for the life of the mine. So in terms of the actual construction costs through the half, through the quarter, we opened our bistro and village at the mine. We've still got some work to do at the Onslow town side. But generally, we've put a little bit of touch up on the road, particularly after the storm. But generally, we're happy with where we are with Onslow and the CapEx.

[Kate McCutcheon, analyst]

Okay. And then just on the balance sheet, Mark, are you still pursuing options to push down that net debt to your targeted levels using some more levers? You've mentioned looking to add some more CapEx back in just now and you believe this is peak net debt, but you've previously spoken on all the options that are available for liquidity. Is that something that's still on the cards here? Or you're happy with how the business is tracking and how deleveraging is looking?

[Mark Wilson, executive]

Kate, the answer is that we still have lots of choices available to us if we need to go there, if we want to go there. When I look at the way that the business is performing, how it's set up for the second half, how Onslow is performing, how the costs are performing, I can see -- generally, I can see the cash that's going to be generated in the second half, and I'm comfortable with where we are with the net debt position. I know it's a number. I know it's a big number.

But I think what -- the way I would characterize it is this. By June, this business will have been fundamentally transformed from where it was 3 or 4 years ago. It's effectively a free option on the lithium, and you'll have Onslow generating significant earnings, you'll have mining services generating a significant substantial annualized rate of earnings with long-life contracts underpinning those earnings.

So what I would ask the market to consider is what that shape of the business looks like, and that's why I'm comfortable with the net debt number. I think our bondholders remain very supportive and confident and we're comfortable with the position also. But as always, we keep an eye on the market. We keep an eye on commodity prices. If we need to move, we can.

[Operator]

We'll go back to Ben Lyons from Jarden.

[Ben Lyons, analyst]

Mark, apologies about the earlier difficulties. Hope you can hear me okay now. Three questions, please. The first one, just following on from Kate around the balance sheet and that working capital release -- sorry, unwind that occurred in the first half. Are you expecting a further unwind of that substantial current payables number in the second half? Good morning, Ben. Nice to talk. Yes, and can hear you clearly. The answer is no. Okay. Second one is another quick one. Just on your mining services contracts. Can you just confirm that all of your mining services contracts or the majority of them are denominated in A dollars?

[Mark Wilson, executive]

Yes, I can confirm that, Ben.

[Ben Lyons, analyst]

Awesome. And then the third one, just going back to your introductory comments around safety at Onslow, and maybe just looking to interrogate those truck rollovers a little bit further. Obviously, with the over pinning worry about the safety of your drivers before you make the transition to fully autonomous road trains. So I guess, firstly, is DEMIRS and WorkSafe investigating or have they completed investigations into the numerous rollovers?

Secondly, have you determined the root cause of those? I know you referred earlier to operator error, but there's potential also here that there might be a design floor in the trailers, for example, maybe the center of gravity is too high, maybe the design of the haul road is insufficient on inappropriate camera or road base, for example. And just as it pertains to your operating settings, what's been the impact on like your load factors on the trailers and your speed, for example, have you had to reduce those factors?

[Mark Wilson, executive]

Thanks, Ben. A very important topic. And with that, I'm going to pass to Mike to answer and I'll supplement.

[Michael Grey, executive]

Yes. Look, oh to answer your question, yes, DEMIRS and externals are still conducting their investigations, and we've said them all the information they require, and they'll come back to us in due course. And to be honest, I don't expect anything out of the ordinary there that will return to us.

In respect to the road, the road has been designed by ourselves in conjunction with third parties, including Main Road. So we don't have any issues with the road configuration or design in that respect for safety. And just keep in mind that the majority of 3 of the 4 rollovers weren't on the haul road at all. So I can't point to the exact cause of the rollovers, but the interface and the interactions of the haul road were a contributor. I won't say they're all a problem, but they were a contributor. So having been on the haul road in total for some time now, we haven't seen another incident and nor should we.

[Operator]

Our next question comes from Kaan Peker from RBC.

[Kaan Peker, analyst]

Just on AUD, I know you've talked about the impact on debt due to AUD changes. Has there been any impact on CapEx spend or expected CapEx spend? And how much of the CapEx is U.S. dollar-based?

[Mark Wilson, executive]

The answer is most of the CapEx that we're doing in Onslow is AUD. We do have transhipper costs that are U.S. dollars. A lot of that's already incurred. We do have commitments for further transhippers outer years, but that's not a spend that will happen this year. We have U.S. dollar facilities available to fund those U.S. dollar spends on the transhippers as necessary. So the answer is little of the CapEx is U.S. dollar denominated.

[Kaan Peker, analyst]

Sure. And my second question is on Wodgina. It seems like there's been a bit of a shift to higher-grade products there as well. Maybe if you can talk to that decision. And also, there still seems to be transitional ore issues. Can we maybe flesh that out a bit more?

[Mark Wilson, executive]

In terms of [ Wodgina ], what I talked about last quarter was that we've done a lot of drilling to better understand the ore body, where we were active. We've seen the benefits of that in the second half. We've been very pleased with the reconciliations that we're getting to our modeling and our planning. In terms of the quality of the feed, that has improved over the half, as we expected, as we moved through that transitional ore that I'd foreshadowed. So generally, Wodgina is shaping up well for a good second half. We're pleased with the way it's progressing.

[Operator]

Our next question is from Paul Young from Goldman Sachs.

[Paul Young, analyst]

Just a few more questions on the cash flow, in particular. I just want to confirm that, that CapEx number of $1.4 billion, that's actually cash CapEx, not accrued CapEx. And then just with the ramp-up of Ashburton, are you -- have you fully ramped up on -- as far as inventories are concerned. So like are we at peak inventories? Are we going to see a build in working cap in the second half?

[Mark Wilson, executive]

Paul, nice to chat. In terms of the inventories, we're pleased with the way that we've been able to build those stockpiles. In fact, we've taken an opportunity through the cyclone to continue to produce and to build out those stocks. So there's a slight build through the first couple of weeks of January, but we're largely there in terms of stocks. We've got stocks at the mine, and we've got stocks down at Yari, which supplement the stock that we have in the shed. So we're pretty comfortable with that. In terms of the cash versus accrued number, the $1.4 billion is effectively a cash number.

[Paul Young, analyst]

Yes. Okay. Excellent. And then just on the -- Mark, just on the lithium assets, just with respect to where the costs were in the first half, I know the cost reductions come through are coming through -- came through late in the quarter. So we should see a decent drop in costs in the second half, but to the tune, I think, of a couple of hundred dollars a tonne to get into the guidance range. So just a question on, I guess, overall cash flow position of both Wodgina and Mt Marion, are they -- post those cost reductions, are they cash flow positive at spot?

And also, if they're not, and you're just hanging on for that option, as you say, as far as when the price improves and iron ore effectively funding lithium, has there been any discussions from the JV partners about potentially putting either of those assets on care and maintenance?

[Mark Wilson, executive]

Short answer to that, Paul, is no conversation about putting them on care and maintenance. I think everybody understands that these assets care and maintenance is not a good choice for a big complex lithium asset. Bald Hill, a little bit different. We can turn that on and again pretty quickly. But with Wodgina with float, in particular, that's a challenging thing to turn off and then turn on again, not the least of which is the loss of experience and so on. So that's not on the cards.

The way I think about it is this, as we take those costs out, the mines will certainly be profitable in an accounting sense. In terms of the actual cash position from them, it really depends on how hard we're going at the strip. And I'm talking to Chris about trying to get some people up to Wodgina sometime in the next half, hopefully to have a look at it and give you a better sense of it.

But what you'll see is that what we're continuing to do is open it up and we're trying to get to a point, where we've got clean feed for 3 trains consistently. It's taken longer than we expected. I accept that. But I've got a belief, and the business has a belief that the lithium market is not going to stay at $900 for the next 5 years. And so, it's important from my perspective that we continue to develop those mines and invest so that when the market does need that product and can take it, we're in a position to absorb to produce it.

One of the risks for the lithium market globally is underinvestment in projects over these last couple of years, and that has the risk for the end consumers. As you would know, we're seeing a steeper rebound in prices. We're trying to make sure that we're positioned to take advantage of that. That's how we're thinking.

[Operator]

Our next question is from Rahul from Morgan Stanley.

[Rahul Anand, analyst]

Three from me. Look, firstly, just to clarify a bit more following Paul's question. In terms of the working capital itself, at the end of last half, you had about $1 billion in receivables as well in terms of your current assets. How has that progressed this period? And I'm just trying to get a read on sort of next period, whether I should see a build or a release of working capital? That's the first one.

[Mark Wilson, executive]

So Rahul, in terms of working capital generally, I think, as I said, we were comfortable or we were expecting -- not comfortable, but expecting to see the payables unwind. In terms of receivables, as volumes increase out of Onslow and out of lithium, there should be a little bit of a build, I would expect, just in line with increased revenues, but I'm not expecting any significant further payables unwind, if that makes sense.

[Rahul Anand, analyst]

Yes. No, it does. And to be fair, I mean, I did have about a [ 600 ] build myself, but I just wanted to sort of understand how it looks like going forward, but take your point on that.

Look, the second one, perhaps if we can go back to the Mining Services business really quickly. If I think about this half versus June half, generally, the volumes internally were better in terms of production volumes, and you've also got Onslow ramping up. What was it then that kept the mining services volumes flat? I mean you talked a bit about your external contracts and how you had a few renewals, et cetera. But was there a drop-off as well there that needs to be talked about? Or is it just seasonal volumes that's causing this flat result?

[Mark Wilson, executive]

Sorry, I -- the answer wasn't clear in the comments that we saw obviously Yilgarn and Bald Hill going into care and maintenance. And we have some mining services -- we had some mining services activities of those operations, which have effectively stopped, slightly less than the increase, as a result of Onslow starting to ramp and Onslow was very early through the quarter as well in volume. So that's why -- and the renewal of the crushing contracts sort of flat in terms of impact.

But as we said, we've got a few new contracts that we won through the quarter that will start to have an impact over the next 6 months or so. And most importantly on the mining services, sorry, Rahul -- most importantly, you'll see the Onslow ramp have a real impact on mining services volumes in the second half.

[Rahul Anand, analyst]

Yes. Yes. Okay. Noted. Thanks, Mike. And look, just the last one. I think we've talked a bit about through various questions on Onslow haul road and sort of the infrastructure. I guess it would be really good if we can give us perhaps a little bit of an update in terms of what type of damage you've seen from the cyclone in terms of the haul road. I mean, what's the repair program looking like? Are you expecting impacted throughput rates? Obviously, I know you haven't changed your guidance. But given this is so topical for people's understanding at this point in time, can you add a bit of color to that, please?

[Mark Wilson, executive]

Sure. I'll [ have ] Mike to expand on that, Rahul.

[Michael Grey, executive]

Yes, it's Mike. It's interesting, isn't it? I mean, I look at this and particularly the cyclone event was significant. And we -- it had a hell of a lot of rain that come through. And you just look at the other operators, our neighbors, Rio Tinto and in Karratha, they had a 20-year rainfall there that was a record, so nearly 300 millimeters in 24 hours. And when you see a port get flooded and the rail get flooded, you can appreciate how much rain that must be, particularly around the port.

So our road is built around modeling around 10- and 20-year floods, and this essentially fell into that category. And at that point, we do have floodways and water will cross the road. And we need to do that to make sure the road remain sustainable. So -- and in doing that with a sealed road, you do get damage on it and we understand that. We know we've actually planned for it. So there's nothing significant in that. Floody unusual rain event and it's just there was so much water come through that catchment area, the result is a result. We don't anticipate any interruptions to our guidance in respect to that at all. And I just see this as a 1- and 10-year flood. We'll deal with it and just carry on.

[Mark Wilson, executive]

I think if I can add to that, Rahul, we have flexibility with our operations because, as you might remember, we have a mine access road that runs parallel to the road. We have traffic management arrangements we can put in place on the road as well. So we have a little bit of flexibility in terms of our operations, whilst we make the changes that we need to make.

I think from my perspective, it's actually not a bad thing. This has happened early on because it actually gives us a better understanding of where the water is going to lie and move across. We're talking about 150 kilometers of road. And look, I appreciate the storm direction might change next time, but generally, it gives us a pretty good idea. We were working off modeling previously. So we're now able to analyze that water impact, how it's going to impact the floods, floodways and so on.

The photos that I've seen, we had a little bit of damage to the batters, which are effectively the buildup of the sides of the roads. So we need to think through in some areas what we do there. One of the other things we're toying with is the surface along part of the road. In our modeling and our planning, we had allowed for a maintenance cost per tonne in the buildup of our own internal cost structures, and we're starting to think about whether we might move to eliminate some of that ongoing maintenance by just firming up some of the surface capping along parts of the road. So that's just a work in progress. It's something we're working through at the moment, as a result of these rainfall events.

[Michael Grey, executive]

And I think just one more point on that, Rahul. As Mark mentioned, it's a learning exercise. So we've intentionally left some of the road buildup in respect to the rock pitching that protects the road in large storms to exactly do that part of the understanding. So we know where the water goes now. We can rock pitch and get our drainage correct. Otherwise, we'd be rock pitching the whole 150 kilometers. So there's a bit of a learning exercise, and we're just managing that through accordingly. So no risk.

[Operator]

Our next question comes from Jonathon Sharp from CLSA.

[Jonathon Sharp, analyst]

Continuing on with the haul road, and I'll just follow up from Ben's question. You've had quite a few rollovers. I would imagine the regulators involved and you're required to put controls in place after these events either to minimize or eliminate or minimize the risk of any other rollovers. Can you just be specific in what controls you've put in place to do this? And does it include lower speeds or reduced loads? Or is there potentially some more costs involved with sealing some of the road or some areas of your site that haven't been sealed or even making turning points larger?

[Michael Grey, executive]

Just -- I'd just like to go back on what I said earlier. Keep in mind, these incidents happened off the main haul road. And yes, we did modify our speeds and our loads at that point in time until we reach the period when we got on -- back on to the haul road in total. So those control measures were put in place in the interim, whilst we were navigating through part of that construction handover period.

[Jonathon Sharp, analyst]

Okay. So there's no reduced speeds on the haul road. I mean, even with this damage, I would imagine with the damage from the recent cyclone, I would imagine there'd be some areas, where you'd have to slow down.

[Michael Grey, executive]

No, there is. There's absolutely. We have traffic management in place, where we repair the roads. All that's been part of our modeling. So again, it's not impacting our overall guidance. It might impact us in the short term. But overall, I'm very comfortable where we're at.

[Operator]

Our next question comes from Rob Stein from Macquarie.

[Robert Stein, analyst]

Just a question on the prepayment. Are they also valued in U.S. those exposures hedged? And then, I got a follow-up on just unit cost tracking.

[Mark Wilson, executive]

Rob, yes, the prepayment was a USD 400 number. And the sales, it's effectively being handled through the sales of iron ore, which are denominated in U.S. dollars.

[Robert Stein, analyst]

Okay. That's good to know. And then just on unit costs, obviously, in the lithium business, we're tracking higher. We're not really seeing the full impact of those cost-out initiatives yet, but yet where guidance has been retained. Are we expecting to see FX play a role in dropping those costs? How are you expecting labor costs in region to help drive some of that benefit going forward?

[Mark Wilson, executive]

Sorry, Rob, did you say FX playing an impact on costs? I just wasn't quite clear on what you said.

[Robert Stein, analyst]

Yes. So we're seeing that, obviously, there's going to be potential FX on U.S.-denominated portions sort of offset working against you, noting that there is a high local currency denomination there. But how are we expecting to see those costs come back down? Are we looking at lowering stripping? Or is it just purely the cost initiatives that you outlined previously having a full half to play out?

[Mark Wilson, executive]

Yes. Look, sorry, when I first listened, I couldn't quite understand you, but I'm clear now on what you're asking. So the answer is that there are a range of aspects that will drive the costs down on those lithium operations. None of them really relate to FX. So yes, stripping will be a little bit lower. But more importantly, we've reshaped the size of the operations, and we've taken heads out. We've taken [ plant ] out, and we're into better parts of the ore body through the second half, as a result of the work that we've been doing over the last 6 to 12 months. So we're very comfortable with where we are. We've seen the impact of those changes already through the end of the half once they've been implemented.

[Operator]

Our next question comes from Lachlan Shaw from UBS.

[Lachlan Shaw, analyst]

Just 2 questions from me. So firstly, just on the lithium market. Just interested in what your marketing team in China is seeing at the moment. We obviously had chatter around a potential SQM tender at $920-odd for spodumene is a weak and interesting spread between that and PRA's current quotes, but also lithium chemical prices are not adjusting. What's your latest read on the market right now and in particular, spodumene versus chemical pricing?

[Mark Wilson, executive]

Lachlan, in terms of -- I mean, it's such an opaque market isn't. I think what I would say is, we're very pleased with our ability to extract value from the market. I think we've shown that with our realized pricing for a number of quarters now. We are seeing better pricing in January than we were in December. We're comfortable with where it's trading -- sorry, trending.

In terms of the LBC market, to be honest, I'm not really that well placed to comment on it because I'm just focused on spod because that's what we're selling. So I'd be guessing, but I'm happy to take that offline and get an answer back to you offline, okay?

[Lachlan Shaw, analyst]

Great. That's really helpful. And then my second question is just on Mining Services. I just interested in, I suppose, you did sort of disclose some external contract wins in the period. What's the market conditions like at the moment? Obviously, there's been a fair bit of dislocation in the West Australia nickel markets, lithium activities sort of scale back. Are you seeing any evidence of sort of increasing kind of competition there in respect of your external contract side of the business and obviously then margins that you're able to realize there?

[Mark Wilson, executive]

I'll ask Mike to answer that [indiscernible]. Thanks, Lachlan.

[Michael Grey, executive]

Well, look, as I said at the last round, we've seen an increase in activity, and we generally do when times get tough in respect to the commodity businesses. So we've seen certainly an uplift in interest, particularly in the Queensland area. And one of those contracts were extended and increased volumes were -- come through on that contract as well. We're pricing a number of contracts over in Queensland at the moment, which is really positive, and I'm sure that's a result of us now being established there.

And secondly, in Western Australia, we're very busy. We are pricing a lot of work with our regular clients. So absolutely not seeing a decline. I'm seeing it consistent with where the commodities are seeing.

[Mark Wilson, executive]

I think -- sorry, just to jump in there. I think that we probably don't do a good job of explaining that the skills and the capabilities that we bring to our clients are somewhat unique. And I'm not just talking about the people and the people at the heart of it, of course, led by Mike. But I'm talking about the end of the supply chain that we have through our workshops, through our range of gear that we have sitting in our yards, through our proprietary designs, our innovation areas. They're the sorts of things that the clients value. And it's very difficult for others, who set themselves up with people to be able to compete against that holistic package. I just wanted to reinforce that. And I guess the final point is safety and that's a key gating item for the large players, as it should be.

[Operator]

Our next question comes from Matthew Frydman from MST Financial.

[Matthew Frydman, analyst]

Good morning, Mark and Mike. Mark, can I go back to the CapEx guidance for FY '25, which is originally $1.95 billion. And then obviously, in September, you highlighted $180 million of CapEx savings to be realized. I know in your commentary, you called out some bits and pieces of potentially additional capital spend. And apologies, I probably didn't catch all of them or the kind of quantum that you're talking about. But if we do the back of the envelope math after $1.4 billion in the first half, that only leaves about $400 million in the second half.

So the question is in 2 parts. Firstly, you've talked about the first half [ SKU ], but is that sort of still the sort of quantum that we should be expecting in the second half? And secondly, if it is still around that $400 million number and we take away what's left to spend at Onslow and also sustaining capital across the business, that doesn't really appear to leave much left over for, in particular, mining services growth, the kind of stuff that you guys were just talking about in terms of new contract wins, et cetera, that you've highlighted. So is there anything we should be inferring there about the Mining Services business, maybe looking a little bit longer dated into next year, any kind of potential for volume growth? Effectively, is your growth in the Mining Services division being somewhat constrained by the CapEx outlook?

[Mark Wilson, executive]

Matthew, that's one question. I'm not going to give to Mike to answer because Mike would take whatever capital I could give him across a whole range of different things that he wants to do. So I'm going to hold that question for myself. And I've got a little bit of a smile on the face because this whole process over the last period of time has forced the business to be more disciplined in the way it thinks about its spend, its capital, its investment in projects. It's actually in one sense, bringing us back to our roots, as a contractor and focusing us on fighting for the dollar internally.

In terms of how I think holistically about the CapEx and the outlook, what I said was that as we shaped our thinking around CapEx, we hadn't made the decision, let alone receive the $800 million from Hancock for the gas. And that's given us a little bit more flexibility with our thinking, not a lot. I'm not taking the foot off the neck of the business. What I flagged was the opportunity to spend a little bit more in a few areas. And what I said was that we're still working through all of that. The business is still fighting for more. And I'll be providing further detail at the half in a few weeks.

[Matthew Frydman, analyst]

Okay. I understand. Thanks for that Mark. And apologies if I missed some of those comments in the intro. But in terms of the Mining Services business growth, I guess, you've still got enough capacity there to deliver on those new contract wins, and obviously, potentially those volumes will only flow through in subsequent years, right, in FY '26 or beyond?

[Mark Wilson, executive]

That's right, Matthew. So just to explain that a little bit better, I probably didn't do it justice. The process that we follow is that some of these projects have got quite long lead times. Some of them also are quite short-term responses, which is one of the things that we're particularly adept at. Either way, Mike and the business need to make a strong business case for the deployment of capital.

Our guiding threshold, as we've talked about for years is a minimum of 20% after tax ROIC. Reality is that we push the mining services business to be higher than that. And we want -- we're not -- we're never going to be a high-volume, low-margin mining services business. That's what others choose to do. And Mike understands that, the business understands that.

If there's an attractive contract opportunity with the right risk profile, the right tenor, the client, the contractual terms, et cetera, et cetera, we'll find a way to make that capital available. We might end up releasing it from other parts of the balance sheet if we need to. We're constantly rebalancing and reallocating the balance sheet moving capital from assets that might have value down the track, but perhaps value that we can monetize much earlier. So they're the sorts of choices we're making all the time. I hope that helps.

[Operator]

[Operator Instructions] Our next question is from Glyn Lawcock from Barrenjoey.

[Glyn Lawcock, analyst]

Mark, you made some interesting comments. You mentioned peak leverage in your opening remarks and then the business will be fundamentally transformed by the end of the fiscal year. I sort of know where you're trying to go, but can you flesh it out a little bit? I mean, when do you think this business will be free cash flow positive at a group level given, say, just current pricing persists? Is it, [ honestly, I get ] -- needs to get to [ 35% ]? Or can you see your way clear before the end of the financial year?

[Mark Wilson, executive]

Glyn, I do believe that by the end of this year, end of this financial year, the group is going to be generating significant cash. Its choice will be whether it reinvests or whether it applies that cash to the balance sheet. That will be a choice that it has. There will be an element as always of some sustaining CapEx, but we'll have choice.

The reason I'd highlight that is that -- and this is the point that I was trying to draw out earlier. My view is that the maintainable earnings from the business by the end of June looking forward are at a very different level and a very different quality than they were a couple of years ago. And so, that gives me a high level of comfort in terms of the ability to support the debt that's on the balance sheet.

That doesn't mean that we won't continue to monitor and track and look at the market and look at the way that the opportunities are playing, all those different forces that we take into account. What I'm trying to say is that we'll have that choice, and we haven't made that choice yet. But that the underlying earnings will be fundamentally different

[Glyn Lawcock, analyst]

Yes. No, that makes perfect sense. And so just 2 other quick ones, if I could. Early payment by your Onslow JV partners, I mean it's not really nice we have to fund AUD 800 million when their balance sheets are much stronger than yours. Could you consider early repayment? Or is that just not off the table -- not on the table?

[Mark Wilson, executive]

Glyn, let me just answer that by suggesting that you're probably not the first person to have asked that question on this call. I think the answer realistically is that's not going to happen. So what that leaves us with is a stream of additional cash over the next couple of years. It does earn effectively at the moment, 7.25%, which it's not a big price when our cost of -- our internal cost of capital is 20% after tax effectively. So I prefer to have that cash in the hand.

I've talked to you before, and I've said before, we have the option to monetize that. It would come at a cost. But if I needed to, I could monetize that $800 million. And when I say it would come at a cost, the cost today would be lower than it was 12 months ago or 6 months ago because we can show the project is now cash positive and that, that line is coming down. We're not thinking about doing that. I'm just putting it out there, as one of the other things that's in the back pocket if we ever needed it.

[Glyn Lawcock, analyst]

Yes. No, totally understand. And just a final quick one. Bald Hill restart, what would you need to see to turn that back on, do you think?

[Mark Wilson, executive]

Yes, that's a great question, Glyn. I'm not going to commit Chris and Josh to that answer, but it would need to be higher, probably 20% higher than where we are today, maybe a little bit more, just to give us a solid run at it.

[Operator]

Our next question comes from Rob Stein from Macquarie.

[Robert Stein, analyst]

Just a follow-up to the cost linkages question before. Can we assume that circa 70% of your mining cost base is local, just to help us sort of think through the impacts for 2H.

[Mark Wilson, executive]

Sorry, Rob, are you saying -- just to make sure I understand your question correctly. Are you asking whether to help with your modeling, you should assume 70% of our cost base with our mining operations is local and therefore, 30% is international currency. Is that what you're saying? Or did I misunderstand?

[Robert Stein, analyst]

Yes, No, no, that's right. Yes. Just trying to get an indication of just how, I guess, shielded you are on Aussie dollar costs, and obviously, you're 100% exposed to U.S. dollar revenue. So just trying to get a feeling for the FX sensitivities that should advantage you in the second half given where currencies are.

[Mark Wilson, executive]

Yes. I mean the major U.S. dollar exposure through our operating costs sit in fuel effectively or diesel costs, which have sort of driven heavily by U.S. dollar movements, but also a lot of the yellow goods we buy are denominated in U.S. dollars, particularly the bigger items of [ kit ]. And so, those elements are more expensive, obviously, in local currency terms today than they were.

Happily for us, we've actually -- maybe not happily, but we actually have a surplus of that gear because of the actions that we've taken over the last few months. So we're actually more in the market of selling that stuff rather than buying new stuff. We've got the gear that we need for Onslow. We've got the gear that we need for Wodgina and Marion. So we're not in the market trying to buy -- to buy yellow gear. So we're less exposed on that than we would have been 6, 12 months ago. So the other costs, generally, labor is obviously Australian dollars. There are some reagents and stuff like that and the lithium side of things are U.S. dollar element. But generally, it's all Australian dollars.

[Robert Stein, analyst]

And those U.S. dollar exposures are passed on to your JV partners by your contracts, if my understanding is correct. Is that right?

[Mark Wilson, executive]

When you say the U.S. dollar exposure, so could you explain? Those U.S. dollar exposure...

[Robert Stein, analyst]

So for example, higher diesel costs in Australian dollars are passed through to your JV partners, as part of rise in [ full provision ] in your contracts. Is that right?

[Mark Wilson, executive]

Apologies. Yes. Yes. Usually, we have fuel issued to us under our contracts, where we're operating with third parties.

[Operator]

Thank you. There are no further questions. That concludes today's call. Thanks for your time, and have a great day. Please reach out to the MinRes team if you have any follow-up questions. You may now disconnect.