Syrah Resources Ltd

ASX:SYR

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Syrah Resources Q2 Quarterly Report Update. [Operator Instructions]

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

[Shaun Verner, executive]

Good morning, and thanks for joining us. With me on the call today are Steve Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Investor Relations and Business Development.

Today, we'll focus on 3 key topics. Firstly, the significant and unexpected uncertainty created by the revisions to U.S. government policy related to the implementation of the Inflation Reduction Act its guidance on graphite and anode sourcing and its impact on the near-term market. Secondly, Balama and Vidalia's operational progress and key position in the near and medium-term market evolution. And thirdly, our strategy and corporate actions for preservation and rebuilding of shareholder value through delivery against our objectives, including the delays, but positive progress on the USD 150 million loan from the DFC, which we expect to complete shortly.

We'll use the slide deck released along with today's report, and we'll start on Slide 5. Given its importance and impact on our current operational and market performance, we'll begin with the IRA guidance from the U.S. against which definition and customer response has continued to evolve throughout the quarter and post quarter end.

In seeking to develop anode material capacity in the U.S. through 2018, Syrah has proceeded through investment decisions independent of government policy support. But subsequent Chinese and U.S. geopolitical positioning and customer responses in the broader EV, battery and input material markets have made policy a very real factor in potential outcomes.

Through policies developed by the prior and current U.S. administrations, Syrah has benefited from funding and support, as the U.S. electric vehicle OEM and lithium-ion battery manufacturing capacity build-out as advanced. This was particularly evident with the requirement for OEMs to source graphite from non-foreign entities of concern or FEOC and that is supply from outside China or suppliers not controlled by the Chinese government or affiliate stakeholders.

In order for them to -- for the OEMs to be eligible for lucrative consumer tax credits supported lower effective pricing for EV sales. The policy, which was primarily developed to ensure supply chain security in critical minerals, a number of which, including anode material are dominated by China and subject to subeconomic pricing impacts.

On May the 3rd, the U.S. government issued further guidance on the inflation Reduction Act related to sourcing of materials and eligibility for these consumer tax credits. This guidance unexpectedly granted a transition period to electric vehicle OEMs, sourcing graphite and anode material, extending the deadline by which automakers were required to use non-FEOC or non-Chinese graphite by 2 years from the 1st of January 2025 to the 1st of January 2027 provided that they met certain criteria to obtain eligibility for the extension, crucially including demonstrating preparedness to meet the objective of local sourcing by 2027.

In the short term, granting the transition period effectively allows use of FEOC graphite supply until the 1st of January 2027 and was designed to increase EV penetration over the next several years by increasing the number of EVs, PVs that were eligible for the IRA consumer tax credit. The ability of OEMs to secure significant volumes of non-FEOC graphite anode material over this time frame it seems difficult, given the limited operating capacity that already exists or was planned to commission in the near term beyond Syrah's business.

While aimed at increasing EV adoption in the U.S. and supportive of Syrah's business in the medium and long term, this extension to the deadline to source graphite from non-FEOC entities is counterproductive to the investment support provided to Syrah for development of Vidalia, as there are impacts of this policy arising on the graphite sourcing approach taken by customers in the near term, the intensity of customer qualification process is already underway and non-FEOC graphite supply chain development.

With some of the implementation requirements still to be fully defined, there are both supporting and challenging aspects of the policy change. The positives include the requirement for OEMs to formulate and demonstrate a plan for non-FEOC graphite [ supply ] sourcing from the 1st of January 2027 through the transition period in order to be eligible for the consumer tax credits in the interim, which effectively requires earlier sourcing and qualification of anode material.

This strong continuing commercial engagement from OEMs on large-scale offtake arrangements for existing production from Vidalia and expansion of capacity in readiness for 2027 and beyond. And the support for and development of other ex-China natural graphite anode material production facilities requiring Balama natural graphite with some making solid commercial progress to underpin development.

The key challenges of the policy change are that uncertain or reduced near-term incentives for -- exists for U.S. customers to accelerate purchasing from existing non-FEOC suppliers, such as ourselves, given that the availability and price of Chinese anode material. There's potentially extended time lines and additional technical and process hurdles being [ handled ] by OEMs, as they have more time, which can extend time frames for qualification and sale of Syrah's products into the U.S. market.

The lack of clarity and the level of commitment that OEMs need to demonstrate to the DOE in their transition plans towards non-FEOC graphite supply and what the consequences are for OEMs prior to 2027, if they fail to satisfy the U.S. government requirements during that transition period. There's also uncertainty over the timing of investments into new ex-China natural graphite anode material capacity development given the visibility that investors require regarding government policy settings. And finally, there's impacts on our own timing of a final investment decision for Vidalia's further expansion project to meet 2027 customer demand without clarity on nearer-term sales from our existing non-FEOC supply.

The policy update has introduced significant uncertainty into the U.S. supply chain regarding near-term non-FEOC graphite sourcing given the intense Chinese volume and price competition. We see the immediate impact is counterproductive to overall U.S. government policy intent and customer supply diversification intent for critical minerals independence, allowing China to entrench dominance of the global graphite supply chain, noting that they currently supply over 90% of graphite anode material globally.

The most immediate impact has been that the transition period has allowed customers to concurrently extend its time lines and expand requirements for product qualification of new materials and [ to preference ] near-term Chinese supply, thus delaying likely commencement of purchasing from Vidalia into 2025. While strong progress is still being made on additional contracting, we have less timing certainty on initial sales from Vidalia and any potential impacts on ex-China demand for Balama products to 2025 and '26 is still to be confirmed.

We're working intensely with Balama and Vidalia's customers and stakeholders to maintain close dialogue and progress in our qualification processes and sales, as quickly as possible to diversify our sales options for existing and future capacity to ensure the highest commercial incentives for purchasing. We're working with government agencies to highlight policy impacts, advocate [ further implementation parity ] and manage our funding relationships. And we're minimizing our own working capital costs and inventory risk by carefully managing the ramp-up of Vidalia to preserve cash in the event that customer purchasing is delayed.

Moving to our key operational and market headlines on Slide 6 to 8. The uncertainty introduced by U.S. policy implementation, along with the evolution of the Chinese domestic anode market and customer responses to overall EV growth rates have been evident in some impediments to our progress through second quarter this year.

Key market and operational points are that, firstly, global EV demand growth increased 24% in the June 2024 quarter compared with the June 2023 quarter to 4 million units. It was biased to stronger growth in China and a higher proportion of plug-in hybrid vehicle sales than previous accounts.

Oversupply of artificial graphite anode material and ongoing deeply negative price competition in China is incentivizing higher use of artificial graphite anode in the Chinese domestic battery market, leading to reduced spherical graphite production and natural graphite fines consumption in China. And only 10,000 tonnes of natural graphite was sold and shipped to third-party customers during the quarter with no fine flake sales to Chinese anode customers. We took the decision not to sell into record low prices, and this was reflected in the loss of anticipated breakbulk demand later in the quarter.

Positively, our weighted average sales price was $735 per tonne CIF with a more significant proportion of high-priced coarse flake in the sales mix. Balama undertook one production campaign to account for earlier inventory drawdown with 24,000 tonnes produced at 78% recovery and strong campaign operating and ESG performance during the second quarter. Costs in the operating period were in line with our expectations.

Operations at the Vidalia anode material facility are ramping up with solid capacity utilization demonstrated in all primary process areas, but lower immediate need for that capacity and inventory build. We've dispatched on-specification, commercial scale production samples to Tesla and to other Tier 1 customers with positive initial testing feedback received from 3 Tier 1 customers.

Vidalia anode material sales are now expected from early 2025 with expanded customer qualification requirements and extended time lines arising concurrent with the U.S. government policy change are incorporated into our planning. And there's been continued strong progress being made on commercial offtake for Vidalia sales, supporting potential expansion, but within FID timing being increasingly dependent on clarification of both government policy and demonstrated sales from our initial capacity.

I'll now hand over to Steve to talk about the current financial position, government funding updates and the progress in [ developing Syrah's ] financial position aligned with our longer-term downstream customer and policy support. Steve has been heavily engaged with government agencies in the U.S. over recent months, and we will make some additional comments on his interaction.

[Stephen Wells, executive]

Thanks, Shaun, and good morning, everybody. Syrah's quarter end cash balance was USD 82 million and included USD 41 million of restricted cash relating to Vidalia, of which $27 million is available for funding the operations during ramp-up. Proceeds of [ $13 ] million from the retail component of the first quarter equity raise were also received during the quarter. Excluding the proceeds from the equity raise, the cash outflow from unrestricted cash for the quarter was $33 million, of which $24 million was contributed to Vidalia restricted cash primarily to fund the working capital reserve for the ramp-up of production of the facility.

Balama net working capital and capital outflows of $6.5 million reflects the focus on cost management at Balama, as well as receipts from the sale of the breakbulk to BTR Indonesia at the end of the first quarter, with cash proceeds received in the second quarter.

Through the second quarter, shareholder approval was received for the conversion of AustralianSuper Convertible Note Series 1 and 3 at a revised conversion price to simplify Syrah's overall capital structure and remove a material potential redemption requirement later in the year.

Clearly, the DFC loan has not closed by 30th of June, as we had anticipated, is the first line of [indiscernible] by the DFC into Mozambique. However, we have made good progress with documentation, essentially agreed and now going through our final approval processes, which are expected to complete shortly. We are targeting a near-term completion and first disbursement of the $150 million loan to support Balama through this current period and appreciate the support of these stakeholders through this process to completion.

We continue to assess opportunities to access tax credits in the U.S. under both 45X and 48C programs, knowing that companies are only able to access one of these 2 programs and rules under the 45X program are yet to be finalized. There are multiple rounds of the 48C program, and an active market is developing to monetize these types of tax credits in the United States.

As Shaun noted, there has been significant activity in other policy areas with direct implications for Syrah, including the application of 301 tariffs on imported graphite from China and the foreign entity of concern or FEOC guidance on sourcing of graphite to enable customers to benefit from 30D consumer tax credits on EV purchases in the U.S. We are very much at the forefront of engagement on this topic, given the progress we have made in developing the supply chain in the United States, our ownership of the globally significant Balama mine and funding support through various programs we have with different U.S. government agencies.

In particular, we have engaged heavily across various agencies and elected representatives to underline the immediate impacts from this policy position on the Syrah business, and frankly, the U.S. domestic graphite supply chain more broadly over the longer term, unless there is an increased immediate commercial imperative to produce domestically produced non-FEOC material. There is a clear need for U.S. government policy to ensure that the developing U.S. industry is supported, so it can grow to meet the broader strategic and economic aims over the medium to longer term.

Also worth noting at this point in the U.S. election cycle, but from a critical minerals perspective, there has been significant bipartisan support for supply chain security across both the current and previous administrations for an extended period of time, and we would expect us to continue irrespective of the outcome of the U.S. elections. Noting, of course, the policy levers may differ depending on the outcome.

And I'll now pass you back to Shaun.

[Shaun Verner, executive]

Thanks, Steve. Moving along to the operational update on Slide 7 and 8. Firstly, to Balama, where we won't spend significant time in this update. Suffice to say that the processing plant is performing well and operating in campaign mode, recoveries were solid in our recent campaign and strong confidence exists about further recovery increases and greater efficiency opportunities once consistent operations are possible.

C1 costs were USD 460 per tonne in the operating period benefiting from a higher production rate compared to the last quarter and the Balama C1 fixed costs, FOB Nacala and Pemba were below USD 4 million per month during the non-operating periods. Shipping costs were higher than average, given the destination mix at $120 a tonne during this quarter, leading to an implied operating CIF -- operating period CIF cost of $580 a tonne for the quarter.

Graphite production from Balama will be focused on restocking, as required by sales and opportunity to increase coarse flake production is being investigated given the current higher demand and pricing for those products. We expect to continue to deliver high product quality, and the Balama team are well across maintenance programs given campaign downtime opportunities. Further efficiency gains are focused on recoveries, increased solar and [ best power ] utilization, contract mining and logistics to ensure that production and standby costs is managed to a lower level as possible, whilst market conditions remain problematic.

Moving to Vidalia. The Vidalia operations team have made solid operating progress in ramp-up, navigating some early operating challenges and utilizing strong problem-solving skills, working without a playbook in bringing on what's the first commercial scale integrated natural graphite anode material facility outside China. Very positively, substantially all production has been on specification and the small volume that wasn't initially on target was successfully reprocessed to meet specification. I'm very pleased with the product quality and following sample dispatch, we've already received positive initial stage qualification feedback from 3 Tier 1 customers against our specification.

We initially targeted 80% capacity utilization by the forthcoming 6-month mark following commencement of on-spec production. Through June and July, however, it's become apparent that maximizing production volumes and inventory build prior to greater certainty on qualification and sales timing is not in Syrah's current interest. Initial ramp-up challenges primarily impacted bottlenecking in the milling area because of which is now being sold pending some final implementation requirements and the timing of full furnace capacity availability, meaning that we were behind target on total capacity utilization.

With the lower need for immediate production, however, we are focused on demonstrating peak production capacity in single lines and key operating segments of the plant. Key progress in peak performance of 60% in milling, 70% in purification and 80% in furnace operations across single lines has been achieved. Importantly, this progress demonstrated to date give us confidence in 80% integrated capacity utilization through this half, if it's required.

Given the lower requirement for immediate inventory, we've also taken the opportunity over the past 6 weeks to work on an additional product stream to broaden the customer product offering, and this has also contributed to the lower total integrated plant capacity utilization levels of 24% in milling, 30% in purification and 40% in carbonization to date.

The Vidalia operations team is building significant operating experience through plant ramp-up and qualification. Commercial qualification processes include higher levels of detailed technical interaction and customer site visits, providing Syrah with further opportunities to ensure best practice across various customer requirements and operating processes.

Now move to the market and customer engagement section on Slides 9 to 11. With significant attention on government policy actions between the U.S. and China, it's important that we retain focus on both the resultant and underlying market dynamics, which will ultimately demonstrate Syrah's importance to the global graphite and anode material supply-demand balance.

Syrah continues to focus on the development of ex-China offtake for Balama fines production, noting it appears that Posco's South Korea spherical graphite capacity and BTR Indonesia's anode material capacity are progressing close to their previously anticipated time lines. And Westwater in the U.S. has secured anode material uptake to underpin development. All of these operations have demonstrated demand for Balama material under offtake or spot contracting.

New interest in processing and qualifying from both Chinese joint venture and ex-China, potential plant development has seen some consumption of Syrah's Balama materials from stocks for testing processes, boding well for future demand. In the immediate term, however, EV materials market conditions are very challenging.

Whilst global EV sales increased 24% in the June quarter compared with the June '23 quarter, most of the growth was in China with a number of EV and battery producers outside China revising growth projections or deferring capacity expectations. At the same time, anode production in China increased 33% in the June quarter compared to the March '24 quarter, and increased 41% compared with the same quarter last year, biased heavily towards artificial graphite anode material.

This artificial graphite anode material production capacity in China has expanded significantly over the past 3 years, creating a notable imbalance with market demand. The growth has created intense competition within China and prompted aggressive pricing strategies amongst new market entrants and the corresponding reaction from established suppliers, leading to reports of a high number of loss-making operations.

Artificial graphite anode material supply in China is dampening overall natural graphite demand. Domestically, Chinese natural graphite production remains modest, aligned with current subdued demand levels and demand for imported natural graphite remains very low. Current price bids, both domestically and the [indiscernible] of funds are below the estimated cost thresholds for all producers involved.

Whilst Chinese export volumes for both anode material and spherical graphite have recovered to levels seen in the period prior to announcement of the China export license controls, the low demand for natural graphite anode material in the domestic market has meant that export anode material requirements were able to be met from domestic natural graphite production or stocks in China through the second quarter. And that anticipated breakbulk volumes of imports later in the quarter did not materialize, and no Balama volumes were exported to China. Any increase in the combined domestic and export requirements for natural graphite anode material is, however, likely to incentivize import volumes.

Moving to natural graphite anode material. In the U.S., future demand far exceeds available non-FEOC supply, and a strong commercial environment still exists for additional sales to build. In addition to the offtake contract that we have with Tesla for initial volume from Vidalia, anode material offtake discussions continue to progress well with others for future volume with one further significant offtake contract process now through all commercial negotiation and pending legal completion and approvals, which we expect to complete shortly.

We continue processes with Samsung SDI, LG Energy Solution, Ford and SK On under our MOUs, working toward offtake and note that investment decisions for non-FEOC supply expansions really need to be made now to meet customer requirements under the IRA in 2027, considering development and customer qualification lead times. Customer commitments must be made before a potential Vidalia Further Expansion project, FID is considered.

Finalization of a binding offtake with Tesla against their option declaration for additional volume from an expanded Vidalia facility is subject to Syrah's agreement on commercial qualification terms and will obviously be influenced by satisfactory progress and timing of sales from the initial capacity. Despite the policy uncertainty, sourcing risk diversification and demand for local U.S. supply continues to underpin expected demand for Syrah's products, and this is reflected in ongoing commercial progress.

So looking ahead to catalysts and making some concluding comments around the government policy position. The initial investment decisions for Balama and Vidalia were made on the [ base ] market views and economics without any expectation of policy support. We believe that the asset quality and operating cost position of both Balama and Vidalia is sound.

Subsequent Chinese government support for subeconomic, low ESG quality, artificial graphite industry expansion and graphite export license controls, as well as U.S. government counterpolicy measures for critical minerals independence such as FEOC requirements, tax credits, tariffs and other policy instruments have markedly changed the underlying global markets for EVs, lithium-ion batteries and anode materials and today are having a particular impact on graphite and anode. The negative impact arises from one government interventional policy, creating a level playing field may require a policy response from other governments and markets until fundamental supply-demand dynamics are restored.

We also note that where customers and governments rightly demand higher ESG and production standards different controls or processes or expanded quality parameters in one jurisdiction over another, commercial outcomes or policy support may be needed to account the costs and timing of that differentiation.

Syrah is continuing to work with customers and relevant government stakeholders to ensure our ex-China capacity is utilized as quickly as possible and the further expansion is viable. Despite the challenging immediate market conditions, there remains significant positive catalysts ahead and Syrah's advanced development stage relative to all other natural graphite and integrated anode material projects provides us with a unique position.

Those catalysts include the finalization of the DFC loan, which is expected shortly, continuing progress in further anode material offtakes for current and future potential supply from Vidalia, progress in various testing and qualification processes and interest from both Chinese and ex-China spherical and anode material buyers in utilizing and securing Balama product for longer-term supply outside of China. It's also important to recognize that changes in the graphite and anode market dynamics repeatedly being sudden and significant, and Syrah seeks to maintain readiness ahead of any of our competition to take advantage of improvement in the market, as it arrives.

We continue to take action to deal with the impacts of recent policy and customer developments and the challenging market conditions for natural graphite on near-term cash flows. With cost-saving initiatives underway already, we have further cash preservation actions being considered for implementation with pending market catalysts and customer purchasing intent to not evolve as expected or if changes to the Balama campaign production rates or Vidalia operations ramp-up are required.

We strongly believe that policy levers and transition rules under the IRA should incentivize as soon as possible purchasing under customer offtake arrangements. This incentivizes support for subeconomic subsidized supply and encourage new offtake agreements to support the longer-term objectives of the U.S. government and U.S. customers for non-FEOC graphite supply, and we'll continue to advocate for that accordingly.

Our objective is to have producing assets that are globally competitive, independent of government policy to ensure the long-term viability of the business. In the immediate term, our objective is to remain increasing sales revenue, as soon as possible, the retention of future value and management of costs for the preservation of cash.

Thanks for the attention today, and we'll now move to questions.

[Operator]

[Operator Instructions] Your first question comes from Ben Lyons from Jarden.

[Ben Lyons, analyst]

First question on Balama, please. There was a statement in the release that without a substantial improvement in Chinese import demand, the expectations currently for the second half of the year fall short of the minimum levels required to incentivize production under the current operational framework. Just wondering if you can possibly elaborate on that statement. Are you implying that there's a potential scenario, where the asset might pass into care and maintenance out of campaign mode into a sort of closure scenario in the second half of the year if you don't observe Chinese import demand.

[Shaun Verner, executive]

Thanks, Ben. I think there's an interim stage, certainly before any decision around further reduction would be considered. And ultimately, what we're saying there is that the target of seeking to sell consistently each month and run at least one campaign through each quarter is compromised at the moment or was compromised during Q2. And in the absence of an improvement in import demand from China that we would have to consider how many campaigns we run and also consider the cost initiatives that we have available to us, particularly to manage the standby cost and try and reduce further that $4 million a month that's currently costing us when we're not operating.

[Ben Lyons, analyst]

Okay. Yes. That's quite clear. Thank you, Shaun. Maybe the second one on Vidalia, please. There's a lot of positive statements in the release and in your commentary around advanced negotiations with a very high-quality local of potential customers like Ford, SK, LG, Samsung, et cetera. I'm just trying to close the circle, I guess, on the clear level of interest in the product that Vidalia is capable of producing and the lack of firm commitments from those high-quality potential customers to date. And I know it's related to a lot of your commentary around government processes, et cetera, and incentivizing ex-China contracts to be actually signed up. But I think probably the most positive statement that was contained within the release was that you are expecting to shortly close a significant offtake agreement with the Tier 1 U.S.-based customer for supply from that facility. So any further detail you could give on potential volumes? Any further detail about the potential customer would be greatly appreciated.

[Shaun Verner, executive]

Thanks, Ben. I mean, obviously, I can't say too much more until that finalizes. But just coming back to closing the circle there, I guess, the dynamics are shifting significantly all the time, and this has been part of the reason for some of the extended nature of some of these negotiation processes. You've had a backdrop of Chinese supply of natural and synthetic graphite anode materials that's continued to overproduce, and price has fallen. And there's a significant question around what is the sustainability of that pricing, and that volume availability and when will rationalization ultimately occur in that part of the market.

And with that backdrop of shifting price and availability, I think the OEMs and battery manufacturers are constantly measuring U.S. offtake against the shifting benchmark. Clearly, government policy settings changing through that negotiation period causes reassessment. And I think there's still a very strong view that U.S. OEMs and battery manufacturers want to secure long-term, high-quality local sourced material from the U.S., and they want to do that competitively, but they need to understand what changes in government policy setting mean for their competitiveness of overall battery cost and sourcing of anode material through that time.

And I think the other thing that has been occurring through the last 6 months, at least has been some shifts in overall adoption rates of EVs. And there's no doubt that there's been some changes in timing and expectation around sales volumes, EV production capacity and battery manufacturing capacity, particularly the timing of new plants, which is also causing some reassessment or ongoing assessment of what volumes are required.

I think the -- from the opposing side, what's absolutely clear is that there is nobody else at this stage, who has built capacity and demonstrated the fully integrated supply chain. So we are right at the forefront there. And we also have a very strong view of the value of having completed that process and what's required to incentivize the next investment for expansion at Vidalia. So it has taken time. But we want to make sure we're building the learnings from our first process. and make sure that we have the best possible roster of [ offtakers ] for any expansion.

[Operator]

Your next question comes from Mark Fichera from Foster Stockbroking.

[Mark Fichera, analyst]

Shaun, just a question about the ramp-up at Vidalia. I understand, just given the cash burn, you want to curtail production or manage that. But also, obviously, you want to achieve the commercial rate to achieve sales early next year. So just thinking about the ramp up now, should we be thinking the ramp-up will come more later this calendar year, early next year? Or should we still be thinking sort of a linear ramp-up from now. So it's going to be sort of gradually reach that [ 8,000 ] -- or will it be more sort of an intensified ramp-up towards in this year, early next year?

[Shaun Verner, executive]

Thanks, Mark. I think much more the latter. We want to align that ramp-up volume with customer demand. Having said that, we also want to be absolutely certain about our integrated capacity utilization, and we will do some further work in the coming months to ensure that we have full confidence on that front. But overall, the ramp-up volume will be very much aligned with what the customer requirements are and the continuation of the qualification process.

[Mark Fichera, analyst]

Right. And in terms of -- Steve mentioned about the cash burn at Vidalia during the quarter, should we expect something similar for the September quarter?

[Shaun Verner, executive]

No, we expect it to be obviously lower because a lower operating rate. We have been very focused on seeking to ramp up, as quickly as possible in first and first half [ to ] second quarter. So we also had quite a number of preparation elements to that cost base in the start of the process. So we expect cash burn for Vidalia to be lower in the event that we are not seeking to ramp up capacity.

[Mark Fichera, analyst]

Right. Okay. And just one final one from me. On the DFC loan, obviously, you mentioned in the release, you expect that shortly. Is it reasonable to assume shortly, it could be a matter of weeks or by the end of August. It's just -- just to give a rough time line of your expectations, would that be a reasonable assumption?

[Shaun Verner, executive]

Yes, it's certainly the intent, Mark, because obviously, we were trying to have that completed before June 30. The vast majority of core material stuff is done and administrative processes and approvals, which are through the finalization steps now. So seeking to have that done as quickly as possible. And I think there's a strong understanding from all parties, ourselves, the DFC and government in Mozambique are all involved in the approval process of the importance of making sure this is complete.

[Operator]

Your next question comes from Dim Ariyasinghe from UBS.

[Dim Ariyasinghe, analyst]

Thanks, Shaun, and thanks, Steve. Just a couple of questions from me. So I guess, first one, just on the market. Obviously, disappointing that U.S. has kicked the can down the road with regards to FEOC and Chinese imports. How has that affected I guess, the intensity of downstream, your customers to engage with you. And maybe a bit of clarity and feels really big, how they're supposed to demonstrate [ efforts ] to move away from China in those 2 years to get IRA support? Like how does that work? Any clarity on that?

[Shaun Verner, executive]

Thanks, Dim. Yes, I think there's still implementation process underway at the moment around how that -- what is required for that demonstration of sourcing intent prior to 2027 and how that is reported. And certainly, there's still understanding to come about what the process is of DOE assessment of that and assessment of eligibility for the tax credits. I think in our engagement, it's clear that there is a very strong view from DOE that the 2027 time frame is a hard headline, and that they need to see very material steps from OEMs and battery manufacturers towards that time line.

The question as to what does it mean for engagement? Clearly, there are always long leads on these types of contracts and a lot of our engagement has been around the expansion of Vidalia to 45,000 tonnes, which already had a 2-plus year lead time on it. So the level of intensity, as I mentioned during the call, on engagement around further offtake is still very good.

The challenge is that in the immediate term, there's a backdrop of availability of a significantly lower priced Chinese anode material that doesn't have a consequence for OEMs and battery manufacturers at this point in time in the U.S. So there's a tension there between near and medium term. But the positive is that the engagement is very, very good on the further offtake. And we have demonstrated very clearly that we can bring this capacity and this capability to market, and we want to expand.

[Dim Ariyasinghe, analyst]

Yes. Cool. And maybe one other just hypotheticals and touching on [ Ben's] question before. I noticed you didn't ship anything to Vidalia this quarter, [ lot it was ] drag. If you were to go into some interim stage or care maintenance, is there a way that you could even refocus on Vidalia like is there a universe exists, where it's amply stocked, and you can focus on Vidalia and let Balama sit idle until the market turns?

[Shaun Verner, executive]

Yes. I mean, we have obligations clearly to ensure that Vidalia can continue through its ramp-up processes and is adequately stocked and is being regularly shipped to, et cetera, under our funding arrangements with the DOE, and we'll absolutely make sure that we meet those commitments. Ultimately, what will determine the operating rate of Balama and the structure of operations at Balama will be those demand signals out of China in the short term and how quickly Posco, BTR Indonesia and other ex-China facility to require further demand.

And it's important to remember that those facilities are not years and years away. The BTR Indonesia facilities is ramping up production. Posco is moving ahead well with their spherical capacity. So we're not talking about very long periods, and we expect that there will be some Chinese. It's a matter of how quickly that comes through to market.

[Operator]

Your next question comes from Andrew Harrington from Petra Capital.

[Andrew Harrington, analyst]

Couple of questions. With Vidalia, are you expecting to make -- so you're going to be producing at a very low rate for sampling for the rest of this calendar year and then having sales in 2025 also at a low rate, far below the 11,000 capacity?

[Shaun Verner, executive]

No, certainly not necessarily at a lower rate in 2025. And the rate [ that ] which we produce during this year will be determined by what arrangements we come to with customers about the ramp-up profile and qualification processes for next year. So there's still more to be determined on that front. We just, I guess, identifying and communicating that it appears less likely that there will be sales this year and that a more significant ramp-up profile will be from early 2025, but we'll provide more information, as we get that.

[Andrew Harrington, analyst]

So production even in 2025 will be mostly related to sampling and qualification rather than actual sales?

[Shaun Verner, executive]

No, that is not what I said. I said that the -- that 2025 production and sales profile will be dependent on the arrangements that we come to with customers through the qualification process. And we absolutely anticipate there will be significant volumes of sales in 2025.

[Andrew Harrington, analyst]

Okay. And then I guess, the second part of that is running at, let's say, you're running at [ 10,000, 11,000 ] for calendar '25, Vidalia is profitable at the current price of material that you have to compete with? Or how do you see Vidalia standing up at [ 11,000 ] rate?

[Shaun Verner, executive]

Yes. So the contractual arrangements that we have in place and that we put in place -- seeking to put in place for Vidalia will reflect the cost structure and the intended profitability of that facility, and we have no objective to do anything other than that. Certainly, seeking to ensure that we continue with the contractual arrangements that we have in place and those that we're building to ensure that we're operating profitably at 11,000 tonnes at Vidalia.

[Andrew Harrington, analyst]

Okay. And then with -- back to Balama, what's the most in terms of proportion of large flake material that you can get out of the plant. Essentially, you're limited by the fact that you can't sell the fines profitably at the moment, as I understand it, and so, trying to maximize large flake makes sense. But what's the crossover point, where that's worthwhile to start production, if you assume current prices.

[Shaun Verner, executive]

Yes. So there is a -- there is a resource limitation and then there's processing limitation. And historically, we have averaged somewhere between 12% and 16% coarse flakes depending on the mix of medium and high-grade materials we're running off the [ run ]. What we are doing at the moment is assessing whether there is short-term processing opportunity to materially lift that coarse flake proportion. And if we are able to do that, we'll obviously assess the cost and operating parameters around it. But it's something that we have looked at previously, but certainly not in environment, where the price differential between coarse and fines were so significant, as it is at the moment and that may give us some additional -- additional responses on how we take it forward.

[Operator]

Your next question comes from Reece Frith from APSEC Funds Management.

[Reece Frith, analyst]

Shaun, just a quick one on the clarification of the IRA time line. I guess, arbitrarily, there wasn't really enough any FEOC supply to sort of feed the market anyway. So I'm not really understanding how it's a surprise, it's a transition period. I'd just like to understand your comments on that.

[Shaun Verner, executive]

Yes. I think it comes to how you incentivize, and there are multiple quality lever options, which could have achieved both some degree of flexibility for OEMs and battery manufacturers in the intervening time, but also incentivize faster adoption and faster expansion of non-FEOC capacity. So we see that it's very clearly a decision made to advance electric vehicle sales and the availability of credits to the maximum number of vehicles. But we firmly believe that there are other policy levers that could assist in achieving both that and the advancement of volumes out of our facility and other facilities that are ex-China.

[Reece Frith, analyst]

Right. Okay. And can you just clarify with the technical qualification, so based on the language here at Vidalia, it says you're happy with what you're producing, but things are going to push back a little bit with customer behavior, as you're saying. Can you just, I guess, cut through with -- is this some -- an issue on Tesla's end in terms of qualification and which sort of the process in the purification and the [ sterilization ], where the issues are? Can you just talk a little to that, please?

[Shaun Verner, executive]

So I mean, obviously we're not going to make any specific comments about particular customers. But what I would say is that the qualification process is firstly, around the physical chemical and electrochemical performance specifications of the product itself. And then secondly, around a series of process and measurement aspects. And every customer has a different [ set ] of those and a different time line for those and different series of exit point.

And I guess, the time frame of the transition period has afforded customers the ability to add as many of those requirements into the qualification process, as they see fit, and that has the impact of potentially extending the time frame as well. So it's not to indicate that there are necessarily issues in the process. It's just a matter of urgency that if someone was required to source non-FEOC material by a deadline, they have a high degree of urgency potentially to accelerate qualification compared to what might be a more conservative process.

[Reece Frith, analyst]

Okay. Fair enough. And then can you just touch on the new product stream? I mean, what are you sort of aiming to sell out of Vidalia before you're supplying to Tesla. Can you just touch on that, please?

[Shaun Verner, executive]

I'm not going to make any specific comment on that at the moment. Suffice to say that it's utilizing all the existing process and existing infrastructure without change. It's more on the material specifications that we achieved through the process. But as and when we move ahead further on that, we'll provide some more information.

[Reece Frith, analyst]

Okay. And then just on some of your customer offtakes, I mean, I mean, you saw that breakbulk to BTR right. Can you just help us give an understanding of sort of the ability to sell into that first train in Indonesia? And then whether or not Posco sort of come to an FID on their domestic facility as well?

[Shaun Verner, executive]

Yes. I mean obviously, we sold into Indonesia at the end of the last quarter. And clearly, there's a recognition of the importance of Balama to non-Chinese supply and large-scale, high-quality supply regardless of any geopolitical challenges. So we firmly target further sales into Indonesia. And we will continue to work with BTR and try to make those things move ahead.

With regards to Posco, our understanding is that their time line is still very similar to what it was with likely requirements in the second half of 2025, more material requirements in 2026.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Mr. Verner for closing remarks.

[Shaun Verner, executive]

Thanks, everyone. We understand there's a lot to take in through this particular update and a lot of interdependency between policy operations and markets. Thank you for the questions and the interest, and we look forward to keeping you [ around ] updated. Thanks a lot. Bye.

[Operator]

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