Syrah Resources Limited

Shaun Verner - MD and Chief Executive Officer Julio Costa - Chief Operating Officer David Corr - Chief Financial Officer Rob Schaefer - Chief Commercial Officer Nova Young - General Manager, Investor Relations

Michael Slifirski - Credit Suisse Reg Spencer - Canaccord Rahul Anand - Morgan Stanley Glyn Lawcock - UBS

Thank you, and good morning, everyone, and welcome to Syrah results second quarter 2018 update. On the call with me today I've got David Corr, our Chief Financial Officer; and Nova Young, our GM, Investor Relations.

I'm also pleased to be able to introduce our new Chief Operating Officer on this call, Julio Costa, who commenced with us in early June. So before we go in to detail of the second quarter update, I'd like to provide the opportunity for Julio to briefly introduce himself.

Julio.

Good morning, everyone. I'm originally from Brazil and moved to Australia 13 years ago.

I'm 20 years experienced in mine processing or in aluminum refining but also in coal in Mozambique. I’ve worked in four different countries, in addition to the slight experience having been GM for three major aluminum refineries and the one coal mine.

And including commissioning and roughing up in Mozambique I have led two or four many processes and operational reviews across the different our core facilities in Jamaica, Spain [indiscernible] and Australia. So in summary, my expertise is across optimization, production ramp-up through leadership, people engagement and connecting technology with people.

I also bring to the table a fair bit of government and commute relations expertise, especially Mozambique, where I've led major negotiations and engagement initiatives with the government. So I'm very excited to be part of Syrah.

And I would like to see a great future of the business.

Thanks, Julio, I'll be moving through the slide presentation that's provided with today's release. So hopefully I can take you through to provide Q2 results from there.

In the second quarter, we continued to have production ramp-up whilst maintaining our strong safety record. Production in the second quarter was 21,200 tons up around 90% on Q1 for a first half total of 32,400 tons.

Whilst this was a significant increase over Q1 was below our original target with recoveries continuing to be impacted by inconsistent flotation and process control. We've made some very good progress on resolving the issues throughout the quarter and into July and the majority of the plant is running well, but there is still work to be done.

Following an extensive review of production led by Julio at Balama, over the past two months, performance improvement actions have been identified for the ramp-up and the production forecast review has just been completed leading us to revise our production target to 135,000 to 145,000 tons for the calendar year 2019. We'll talk further about that later, but as a result, target C1 cash operating costs have been revised to around $430 to $450 a ton by the end of '18.

And in 2019, we expect costs to move through 400 and down toward our longer-term target closer to 300 as volumes increase. On the sales side we sold and shipped 16,000 tons of graphite in the first half with the further 7,000 tons sold awaiting shipment at Nacala as of the 30th of June.

Sales shipment started to lift significantly in Q2, and with production a little lower than planned, we focus on the existing customer and contracts and further qualification shipments throughout the quarter. Product qualification feedback continues to be very positive resulting in increased sales volumes.

In the near term, the product related cross realization remains below the basket price that’s been referred by external price reporters and we continue to focus on price discovery result into different market segments and different geographies. We do have expected an improvement in prices through the second half compared to the first half due to new sales, contract re-pricing and changes in our product mix.

Fines pricing fundamentals are currently dominated by the China’s domestic markets and we expect seasonal variation in the near-term and improvement in the medium-term as China transitions to a net importer of high quality fines as global electric vehicle penetration increases. With regard to our Battery Anode Material development, the purchase of Vidalia site in Louisiana is almost complete, settlement of the site and the enabling utilities agreement will see a transition to installation.

And we’re still targeting initial qualification production by the end of this year. But that’ll be subject to mobilization timeline and capital allocation.

Our BAM product development activities continue to progress very well, and we commenced full cell testing with a global top 10 battery producer in Q2 with initial results indicating positive performance to build on the very positive benchmarking results for precursor material release last quarter. At the end of the quarter we had US$56.7 million cash on hand, which was a little better than our forecast guidance of $55 million with the difference mainly attributable to management of expenses.

Our net cash outflow forecast continues to reduce as production and sales ramp-up with key trade forecast net outflow of US$17 million and a cash balance forecast of US$40 million. And a significant further decline in cash flow is expected in Q4 given the ramp-up pro forma.

We remain disciplined in our expenditures and our major BAM capital allocation will be made in conjunction with the Balama cash flow profile. The cognizant this is a very important period for the business with the balance of improved production ramp-up, increasing shipments and management of our cash position required to maintain our growth.

The Syrah team clearly feels the accountability to deliver against our objectives in the second half of 2019. Now move to Slide 3, on health and safety, Balama operation ended the quarter with a TRIFR of 1.0, up slightly from 0.8 in Q1, but nonetheless a very strong safety performance outcome for the team on the site.

We’ve also begun significantly increased the leadership team's infield verification and coating work as we bring up the general level of safety understanding in the team across [indiscernible]. Syrah's commitment to global best practice and sustainability has been recognized with the receipt of ISO accreditation, the health, safety and environment during the quarter.

This is a significant milestone for any operating business but only company that's finally bringing in operation for a number of months. Our environmental monitoring program continues to show that we’re in line with over 200 license conditions on the site.

We’ve commenced planting native trees for the Balama nursery with the aim of contributing to Balama’s medium and long term rehabilitation program. Our community program continued to progress very strongly, including the commencement of construction for the Balama Training Center and the commencement of the livelihood restoration program.

During the quarter, we also helped refurbish the local-headed school for the local villages [indiscernible]. On site at Balama, 93% of direct employees of Mozambiqueian nationals, with over 50% from the local communities, moving up again towards that target of more than 60% following the transition from construction to operations.

As a precaution, security procedures and protocols have been increased at Balama through the quarter. Recent reported security incidents in the north of Cabo Delgado province, remote from Balama, had no impact on our operations.

So we continue to monitor the situation and we have the ability to quickly mobilize additional levels of security as they may be required. Moving on to Slide 4, and operational performance.

In Q2, we produced 21,200 tons, but 32,400 tons of graphite produced in the first half. As I mentioned earlier, this was below plan, but we've been working incredibly hard to lift the pace of ramp-up and we're making very good progress.

We're pleased to have Julio on board and on site, and he's undertaken an extensive ramp-up review throughout the last two months. Julio's strong track record of driving operational delivery has allowed him to quickly identify with the team the key areas of attention required to support the improvement of graphite recovery and production ramp-up performance.

Our mining activities continue to perform well with steady state ore mining and high grade ramp ups throughout the quarter, mill feed and feed driver environment plan. And the filtrating, drying, screening and bagging lines are all performing well with optimization continuing as volume is increased.

Recoveries improved to 49% in Q2 from 34% in Q1, and we recognized that this is still well below plan, but substantial improvement through floatation reagent dosing and the secondary grinding circuit were achieved and the float level control issue was resolved towards the end of the quarter allowing us to focus now on bringing up the plant volumes more quickly and ensuring we could have ramp-ups target. The review coordinated by Julio has identified the key actions required to improve recoveries through improved floatation and process control and increased operating stability.

Enabling activities to achieve these outcomes are underway in all the identified areas and we'll talk about that a little more shortly. In Q2, the average carbon grade of our final product was 95.2% with the majority of products expected 95%, but the range of products between 94% and 96% was produced.

Some graphite has been produced outside our planned product specification range during ramp-up based on both the carbon grades and the particle size contribution. The production of 94% to 95% material was not initially planned, but the product is well within global market specifications and the majority is now being sold with price differentials in line with the international markets, and we expect the amount of this material to decline significantly as we move forward.

By the end of the quarter, the production split of fines to coarse flake had begun to normalize towards the long-term ratio of target of 70% fines, 30% coarse grade and performance is far more consistent on that front. Now move to Slide 5.

As I've mentioned, a detailed improvement plan has been implemented as a result of the review with key areas of focus to improve and better integrate operations, purchase and equipment management practices to minimize production variability and to achieve improved team alignment and accountabilities to the outcomes. All of this is designed to enable the ramp-up profiles to be achieved, the quicker resolution of any issues as they arise.

Plant availability and utilization are at very good levels already. And the feedback in improvement cycles focused on recoveries is increasing the pace.

We believe we know what needs to be done and we’re implementing it in a sequence manner. We also continue to access international expert assistance as and when it’s required.

Installation of the attrition cells was completed by the end of Q2 as commissioning is commenced and now expected to be operational in August. The attrition cells allow for production of high grade graphite grades between 96% and 98% fixed carbon.

We’ve got a very dedicated and motivated team on site and the pace of operational learning and optimization is increasing every day. While it’s frustrating that we’re experiencing some delay in ramp up, we also need to remember that we’re optimizing the largest network graphite operation in the world and preparations around the long life asset in a relatively remote region.

We’ve moved to about 25% design capacity in Q2 against the target of around 30%. And we’re over 30% already in July, taking the rates 50% at the end of Q3 and 78% capacity at the end of the year.

When looked at in this slide, the ramp up profile is sensible and the improvement between Q2 and July shows that we’re now on track. The state of ramp up was always planned in the second half of this year and the profile has not changed too much from what we had in place previously.

We’re obviously, primarily focused on the immediate continuing ramp up but it’s important to note regarding Balama that we’re also updating our Vanadium scoping study and expect to complete this in Q4. Now move to Slide 6, following the operations review, production forecast review was just completed resulting in 2019 production guidance being revised to 135,000 to 145,000 tons with the second half ramp up split between Q3 and Q4 approximately 40% to 60% as we target an exit run rate of 70% capacity utilization at the end of the year.

As a result, our operating cash costs have been revised to $430 to $450 a ton and we’re forecasting Balama to be operationally cash flow positive from like 2018. First quarter end has been a very good improvement supporting daily production rates.

For the month through July 28th, average daily productions already increased by 39% versus the Q2 average and we’re on track to produce just over 10,000 tons for the month with clear steps to continue to drive of increase in August. Now turn to Slide 7, on sales and marketing.

Customer feedback on the product quality continues to be very positive resulting in increased order volumes. Contractual negotiations have continued throughout the quarter and particularly with increase in Chinese interest in our products and market -- across the market segments.

During the first half, we sold and shipped 16,000 tons of graphite and ahead of 37,000 tons sold and awaiting shipment at Nacala at the end of June, and sales in the first half were primarily focused on our existing contracts and qualification shipments. Additional contracts were settled during the quarter, primarily to near-term shipments and, of course, to sell some of the products that was outside our initial specification range.

New contract discussions during the quarter were somewhat impacted by the lower production with the needs for greater certainty around production volumes before making additional commitments. And we’re now firmly focused on moving those ahead.

With regard to logistics, we’ve been able to really start to push the supply chain as volumes have increased. Trucking, the cross dock facility that we call the CDF, and international shipping are performing well.

And our logistics contract has transitioned to the first built CDF and dedicated trucking fleet through the quarter. Cycle times in product storage and movements at the Balama warehouse and also to customs processing at the Port of Nacala, led to higher than planned inventory of 9,000 tons at Balama at the 30th of June.

Resolution of these issues is in hand, which will lead to a related working capital. In steady state operations, we expect to run about 15,000 tons of product inventory between Balama and Nacala.

Moving on to Slide 8, on pricing, as we previously advised the product weighted realized price remains lower than the basket price inferred by external reporters. Q2 outcomes reflected the product mix, prioritized fines shipments, battery customers, and market dynamics in China, particularly recent fines.

We expect an improved product related price in Half 2 versus Half 1, with planned sales to a broader range of customers and as a product mix of fines to coarse rate rebalances. Our continued demonstration of product quality and consistency translating to additional contracts and larger order volumes.

The price arbitrage exists between the Chinese domestic market and the international markets. China is currently the largest producer and exporter of fines material globally.

And as a result the fines process achieved by Syrah influenced by a mix of China's domestic market fundamentals, seasonality, quality as well as inland logistics costs and VAT. The Coarse flake market is balanced to deficit and current prices of Coarse material reflect this in both the Chinese domestic and international markets.

It should be noted however that the Coarse flake market is significantly smaller and has a lower growth profile than the fines market. In the medium term, we expect China to structurally shift from a net exporter to a net importer of natural graphite, particularly fines in 2019 and 2020.

It's a non-driven by lithium-ion battery anode production growth. Fines price fundamentals are expected to strengthen with the rebalances of the global market.

Additionally the value in use delivered through consistent high quality, low impurity Syrah material will provide pricing differentiations. Variation in the third party reported prices is not uniform across the product range, across locations or over time, and by continuing to support an increase in the understanding and transparency of reported prices, through interaction with existing reporters and internationally recognized IOSCO accredited price reporting agencies.

As such caution should continue to be exercised in applying published price data to site and sales. Now move on to Slide 9 and Slide 10.

Despite well reported geopolitical issues, the global industrial production remains at historic highs and continues to expand. This is being reflected in the steel market where year-to-date production growth in May is up 6.6%.

However, supply growth in steel is outpacing demand at present and we remain cautious on the outlook of the steel markets. This year 60% to 70% of flake graphite demand will be driven by steel production, while it’s obviously a slower growing market segment than the lithium-ion battery segment, it remains a very important base weighted demand for Syrah in the initial use of production.

Moving on to battery demand, from January to May this year, global total passenger electric vehicle sales were 573,000 units, a 69% year-on-year increase, and current growth is tracking ahead of our base case forecast of 50% annual growth of this year. Due to the change in subsidy policy in June in China and the possible short-term impact on the sales, in the second half of this year, we've not upgraded our electric vehicle or flake forecast for 2018.

The market share of electric vehicles in China this year is 4.1% and around 2% globally. China continues to underpin the electric vehicle market comprising 51% of year-to-date sales with the growth rate of over 100%.

The recent changes to subsidies in China will better reward cars with longer range, which will support the production of vehicles with largest batteries. This is a positive to graphite demand and it's the size of the battery has a direct impact on the amount of graphite content per vehicle.

We expect average battery sizes across the range to increase by 2% to 3% per annum over the next decade. Year-to-date with the amount of battery sales measured in terms of gigawatt hours for electric vehicles with 17 gigawatt hours, growth of 65% year-on-year.

Year-to-date, China has been sold 12.6 gigawatt hours of new electric vehicle lithium-ion battery capacity which is over 200% year-on-year capacity installation increase. Our prioritization of fines shipments in Half 1 to China and our battery related customers reflect that strategy to be the base load of natural graphite supply in the global electric vehicle sector.

By the end user market is moving in such a rapid pace, it's really important for Syrah to enter the battery supply chain as quickly as possible, and we’ve started to achieve that in the first half of this year. On the supply side, China’s natural flake production is entering its seasonal summer peak to producers in several areas such as Pingdu, Shandong and [indiscernible] continued to be impacted by increased environmental checks and requirements.

In relation to trade, a 10% tariff was imposed on natural and synthetic graphite exports from China into the U.S. in July, which will potentially incentivize the China's sourcing for the U.S.

buyers. We continue to expect the global demand for natural flake graphite to increase by around 10% this year, reaching around 780,000 tons for the year.

With the electric vehicle and steel market tracking ahead of our base case forecast, there’s potential upside to this feud if the trends continue. We continue to expect the overall market to move into deficit through 2019 and 2020 as the demand trend of material increases and global electric vehicle penetration approaches 4% to 5% of the total vehicle market.

Moving onto Slide 12, and battery anode material, during the quarter we further progressed our Vidalia site purchase, which is scheduled to complete in August. Company's due diligence has been completed in the utilities agreement; the natural gas, water and electricity are almost complete.

And we’re confident that they'll facilitate a very attractive long term upside. The air and water environmental discharge requirements have been met, and we’ve strong up from the City of Vidalia and the community, who are largely in favor of developments.

Production of first qualification product is targeted by year end but will be subject to our installation timeline and allocation of the capital, which has been managed very closely according to series of decision point. On the BAM products development side we commenced full battery cell testing with the top 10 global battery manufacturers using Syrah battery anode material produced from our pilot plant.

Initial results indicate positive performance similar to established lithium-ion battery products and provided a very valuable insight into performance attributes to be further optimized. Combined with previously announced testing and benchmarking outcome through our battery anode material precursor products the baseline of battery performance properties is being established through our product to facility market entry.

We also increased our engagement with potential battery customers throughout the quarter to continue to refine products requirements. At the same time, these discussions provide valuable insights into options to develop cooperation through the value chain, with market positions having strengths in different areas and valuing different aspects of Syrah's participation in the natural flake and BAM market.

The feasibility study for the first phase commercial scale BAM plant is progressing, the good progress on the purified spherical side. The optionality available with regard to floating means that we will take time to fully assist these options.

With that I'll pass you over to David Corr, our Chief Financial Officer for an update on the financials.

Thanks Shaun, and good morning, everyone. Moving on to Page 12, as mentioned earlier, the group held cash reserves of $56.7 million at 30 June, a net decrease of $23.8 million during the June 2018 quarter versus our forecast of $25 million with the positive variance mainly attributable to disciplined management of our expenditures.

In terms of project development activities, $2.8 million were spent during the quarter bringing total project development expenditures to $211 million against an unchanged project capital cost of $215 million. The key cash outflow terms of expenditure during the quarter related to production ramp up and sustaining capital projects made a sales repeat at Balama with $16.2 million was spent.

Balama's overall operating cost structures are developing in line with expectations, although we know there are some cost pressures developing for certain items, which are being offset by other savings. As Shaun mentioned, the C1 operating cash costs by the end of 2018 have been revised to $430 to $450 per ton as a result of the revised production forecast.

Management has a sense to criteria for the declaration of commercial production as disclosed in the Group's annual report for 2017, and it's concluded that it has not yet been satisfied. Accordingly production ramp up costs for Balama offset by revenues received continue to be capitalized with the balance sheet and this will continue until such time of commercial production is declared.

The company's disclosure in the Appendix 5B of the quarterly report reflects this methodology. In terms of sustaining capital projects the key item may be expenditure during the quarter with the completion of Cell 1B of the Tailings Storage Facility, forecast of the sustaining capital expenditures for 2019 remain unchanged at between $7 million and $10 million.

Project development products should ramp up at sustaining capital expenditures for the quarter also included $1.2 million of VAT payments in Mozambique, bringing up the total VAT receivables to approximately $18 million. As mentioned last quarter, the Mozambique government continues to address the challenges of VAT recovery and has put forth a range of initiatives that will assist the company going forward.

We received our first VAT refund in April, and whilst this amount was only small, it was a positive signal in relation to the recovery of this amount. We also expect further recoveries in Q3 and Q4.

In relation to BAM activities US$2.9 million was spent during the quarter with the key items of expenditure including due diligence of the Vidalia site purchase, further payments for long lead equipment items for milling and shaping activities, an ongoing product development and testing activities with Cadenza Innovation. We expect to see strong improvement in the group’s net cash outflow in Q3 versus Q2 as sales revenue increased from higher volumes, improved product mix, reduced logistics cycle times, releases of working capital and disciplined cost management.

Q2 net cash outflows for the group, for the third quarter are forecasted to be $17 million and a forecasted cash balance of approximately $40 million is expected as of the 30th of September. With expected significant improvements in production rate in the second half versus the first half and continued global interest from both industrial and battery end user markets driving increased sales and revenues, we expect to see a significant reduction in the net cash draw of the business and forecast achieving positive operating cash flow at Balama towards the end of 2018.

We’re heavily focused on maintaining a strong balance sheet and recognize that this is a very important time for the business. We continue to manage our cash reserves in a very disciplined manner, which is included a focus on the timing of further major capital expenditures on the BAM project being subject to the cash flow profile of operations at Balama.

Our level of discussions with potential financiers has continued to improve as we ramp up production. We have been clear on our intent to introduce a debt facility into the business as we mature and we continue to review financing requirements to optimize the types of strategic development as Balama production ramp-up occurs and our sales and revenues and end use markets develop.

I’ll now hand back to Shaun to conclude the presentation.

Thanks, Dave. So in summary, Q2 has been strengthened the operational team at the executive level and onsite.

And this team has developed high valuable operations experience that the right team on board to continue to develop our performance. And health and safety and environment focus continues to be our first priority.

Despite Q2 performance being behind the original plan with same [indiscernible] increasing production by increasing recoveries and optimizing the circuits and have improved performance by almost 40%, again post quarter end. Momentum is strong and although we still have work to do achieve that production ramp up, we're quickly building on wins across the business.

With Julio's commencement as CEO and the team onsite have a very clear plan focused on improved process and operational control linked to production ramp up milestones. As sales and marketing efforts in the first half have progressed well, we've been focused on fulfilling our existing customer contracts and qualification shipments.

As our qualification feedback continues to be positive and as we establish ourselves in the global graphite market and improve our product quality and consistency, we’re increasing sales volumes and we can now move confidently commit to delivering the further contracts. We expect strong demand growth for flake graphite with the market balance in transition for 2019-2020, with China shifting to a net importer advanced graphite over that period, as the demand driven by global penetration of electric vehicles increases.

We also expect fines price fundamentals to improve as the global fines market rebalances. Our battery anode material site purchase and enabling utilities agreements that are nearing completion and the ongoing product development and testing works forms the baseline of battery properties to facilitate market entry into the downstream.

We remain disciplined with our cash spend and allocation of capital to the battery anode materials project is being made in conjunction with the development of the Balama cash flow profile. Overall, whilst the quarter didn't entirely meet our expectations, we have a clear improvement plans by some concrete actions to drive higher production, and the team onsite has already achieved some very good improvement in performance early in the third quarter.

With that I'm going to turn it over to questions. Operator?

Yes, thanks very much. I've got three or four questions, I think.

First of all the cash results, when you gave your projection of cash balances based on better performances than what you delivered. I'm trying to understand how you achieved a slower cash consumption that, I know what you said, but, specifically is there anything that you didn't spend that will come back and require to be spent in the future?

If you deferred expenditure, I'm just trying to understand how you'd like to achieve that better outcome please?

Thanks Mike. It’s a combination of things.

Obviously, we have deferred some sustaining capital expenditure. And our initial budget allowed us a fair bit of room on that front.

Nothing that we have deferred at this point, has us concerned about things coming back to haunt us later on. The other thing to note, of course, is that we’ve lowered volumes, transport costs are also lowered and we also timed the implementation of the CDF and the tracking flake to optimize that cost impact as well.

So it’s a combination of a number of different factors.

Okay. Thank you.

Secondly with respect to that Balama inventory - that 9,000 tons of Balama inventory, is that a saleable product? I'm trying to understand how you talk about working capital relates with that 9,000 tons yet the steady state total inventory 15.

So is that just a balancing between the two locations.

Yes, absolutely. So it’s absolutely all saleable products.

As I said during the presentation, although tracking the CDF and shipping are going well, we've had some initial challenges in the operation processes in Balama warehouse. And it’s really around how we pick, sorry -- how we store, pick and load the material in the storage locations reducing the efficiency of picking for orders.

In addition to that the customs challenges at Nacala have meant to say have not been pushing through as much or as many containers per day as they envisaged. That's led to slightly higher inventory at Nacala.

And that obviously has an impact pushing back up into Balama, so both of those issues have been addressed with a lot of attention over the last month or so. We've made some very positive changes on the product warehouse management side and also we've been engaged with the customs authorities around the recoursing required and the processes required to ensure that we can move the number of containers per day that we need to into the port.

Right, thank you. With respect to the plant performance, my understanding, perhaps wrongly was at the end of last quarter, the key issue was the float level control, and you're saying that's resolved, but you're still downgrading the second half.

So what's the specific challenge would be plant now given that it sounds like everything upstream and downstream of floatation has been working quite well and the key floatation challenge has been overcome. So I am little confused as to where the challenge actually lies now?

Look, I think the floatation specific challenges, we outlined last quarter have been addressed. And just to recap on those, we had reagent dosing, we had secondary grinding circuit utilization and then, obviously the float level control issue as well.

They were addressed through the course of the quarter and that’s really phrases up now to increase the fee rate and flow of material through floatation. But it is a process that’s bringing up those volumes, and ensuring that we can achieve process control as we did those volumes through the plant.

And that’s not something that happens overnight, as I said we’ve made very good progress on that just in the last month since the end of the quarter with daily production rates up 40% on the average 52%. But it is -- there’s not a single issue that is preventing us from improving production.

It’s really about the integration of process control in floatation, in particularly, as we increase those segments. So truly that was plan has a number of components to it, and the first of which is improving the operational management systems to integrate the different areas of the plant and we ensure that we get better flow through as well as assuring past issues like resolution where it occurred, secondly is that reduction -- risk reduction to enable us to ramp up more quickly, thirdly operations process and equipment management practices as we outlined during the presentation, and then lastly, the leadership effectiveness through the integration [indiscernible] between different plant productions.

So the focus is very heavily on floatation, but obviously, we need optimize all assets of the plant as we continue to bring up those flow rates through floatation.

And finally with respect to BAM, my recollection is perhaps wrong, was that most of the equipment had been purchased already pending that site. So now will you talk about the objective this year being contingent on cash, what is that has been beyond what you spent already?

You’re right, most of the equipment, particularly for milling and shaping has already been purchased, and it's actually in the U.S. already.

There’s still some purchases related to pure floatation in await end of the plant to continue, but they’re relatively moderate. Obviously the move from steady site through installation has expenditure [indiscernible] and we’re making those decisions on the mobilization timing in line with the cash flow profile at Balama.

So there’s no major capital items left. But it’s really around the cash spent and process of installation ramp up and preparation for that first delivery and the timing of those spend decisions.

Good morning guys. Just a couple of questions from me.

This one related to pricing, I know, what your policy is on in terms of commenting on pricing and you have provided some comments in regard to the discount that you are realizing versus third-party inferred pricing. Are you in a position to provide any guidance on the quantum of that discount or that's not something you're willing to comment on?

Thanks, Reg. No we're not willing to comment on that yet.

I think, and the main reason for that is that as I've said during the presentation, we're still in the process of a number of significant negotiations and extending the reach of sales into market segments and different geographies, so it is premature to do that. The other thing that, I'm very cognizant of is working through the full year cycle of process.

There is a distinct seasonable element to pricing in this industry, particularly from the Chinese production in the Northeast. And we want to make sure that we have a very good deal for that, and now placed within that cycle as we move through the course of the year.

What I'll try to do in this quarterly update is provide a little more color on the differentiation between the coarse flake market and the fines market, and in particular the multidimensional nature of pricing and fines, but outside China and inside China and the fact that the Chinese market dynamics are significantly influenced that pricing. And that it’s not the same as many other commodities where Chinese prices reflect the international price proxy, I would say.

There is a lot of dynamics moving that price around through the course of the year as well as differentiation of product qualities as well. So these taken some time to build out that picture.

Understood. Thanks.

The next one relates to BAM. I know you've answered Michael's question in terms of expenditure over the next few months and laid up to when you expect to produce first qualification product.

Can you provide some guidance in terms of actual dollars that you plan to spend between now and first product or?

Well, we had said last year that we're allocating $30 million to the battery anode material spend over the course of the development. We had continued to spend that through the quarters.

We haven't specifically outlined in future of what we plan to spend in Q3 and Q4. But you can see that the expenditure on BAM is relatively large in Q2 and we'll continue to manage that very, very closely.

And last question is the move to positive cash flow. Can you tell me what the breakeven production volumes would have to be based on current product pricing?

Look, Reg, I'm not going to give you a specific number, of course, but you know the way we look at the BAM is that it's a large front. And we need to get to at least 50% of its production capacity for it to be running in the way that we would expect for us to be managing cost in an appropriate way.

So that’s the initial target through this quarter, and obviously we want to get 70% by the end of the year. That’s all we will say on that front.

Just a couple of quick ones from me. Firstly, Shaun, on the pricing for the products.

Right from the start of the year, we’ve sort of talked about premiums potentially being achieved for our product going forward, but then we’ve obviously gone to discounts. And is it fair to assume that these discounts are in-commissioned and that in the longer term you’re still expecting that your product will achieve premium over the prices that we see or has that view changed?

No, not at all. And absolutely expect that that product will achieve premiums over the market front.

As we’ve had this discussion a number of times, I think part of the issue is the clarity and timeliness of market pricing and what have represented these are quarter prices are off the real market. So it's something that, as I've said earlier, we are very keen to work through the full year, through the cycle.

But I’ve absolutely no doubt that we’ll achieve a premium for the quality of this material, and impacting a number of cases demonstrable history of having dumped our rates. So it’s not a -- there’s no change in our view around that.

And just moving into BAM now, just wanted to understand with regards to the equipment that’s already been shipped to the U.S. and perhaps in a way as somewhere, has the cash already left the bank account for that one?

Or is it committed at this stage and you’ve got a second-half cash out flow related to that?

Look, Rahul, for the large it’s already is the equipment has been purchased today is very small amount remaining. As Shaun mentioned, there’s some further commitment that relate to Mike on the welding, but for the commitment that we have made today -- we have the [indiscernible] on the ground in the United States that has been largely mix.

And am I correct in assuming that if there’re to be capital constraints, then the priority is going to be to avoid additional capital requirements and perhaps delay them if required a bit so that the cash flows match appropriately?

Yes, we’ve been previously disclosed this discussion that the priority is on Balama and the ramp up at Balama and ensuring that this is providing the requisite cash flows. So we’ll do everything that we can to continue to make the target of the qualification material by the end of this year, but if we have to select anything, it’ll be around the timing of BAM.

And then moving onto the flat 50,000 tons inventory levels to steady state.

Yes.

Am I correct in understanding that that’s related to the current lower production rate and going forward it should be circa 30, once you reach 370?

No. We would like to see inventory levels around that 15,000 ton mark brought up to full production.

Obviously, we have to see how the supply chain performance continues. But you know the cycle of deliveries at Balama and through the CDF gives us access to vessels, which are running on weekly schedules.

So we should not have the need to build wider inventories either at Balama or at Nacala, but there will be times when the processing, particularly this current point leads to higher inventories at Nacala based on that schedule. But in the longer-term, we want to make sure we're holding a lot of inventories as we can.

And just the last one from me related to the mining agreement with the government understand is pretty much in the final stages now. Are you able to disclose at this point in time just some basic mechanics?

I wanted to understand whether the -- I assume, there'd be a portion of the project that will go to the government, but has there been some understanding around whether the portion of CapEx spend that is attributable to that stake, would be a cash inflow as a lump sum or whether that comes out of future cash flows that you'll generate out of the project?

The expectation that we've previously discussed and which is China, in the mining agreement is a 5% pre-carried interest for the government and there will be no cash inflow around that pre-carried interest. That pre-carried interest is in Twigg, the subsidiary company which runs Balama in Mozambique.

Got you. Okay.

That's very clear. Thanks very much.

I'll take the rest of them offline.

Firstly, just your comment about, you said how representative the reported prices out of the real market. Just thoughts, I know it’s still early days, you still get bunch of volume to hit the market, but where do you think that goes as reported prices.

Do you think they're too high, too low, just any thoughts on that? And then the second question is, just it sounds like you will or you are prepared maybe delay Balama just to match the cash flow.

Are there any adverse outcomes to delaying Balama, terms of ability to keep the site, the equipment you've already pre-purchased? Just wondering what maybe adverse impact?

Thanks.

Look, on prices, Glyn, obviously, we're working consistently over the last two or three quarters that we're achieving outcomes that are below those prices or the basket prices incurred by the price reporters. So I'll probably split the answer into two parts.

So firstly, in the short term, I think the key thing to understand is that prices reported by the three major price reporters, all different grades, all different particle size distributions. There is not a consistent method of determining whether they are [indiscernible], and largely they have little information on the Chinese domestic market.

And obviously this is the first significant exporter natural graphite into China. And we’re in the process of adjusting the global trade flow of this material.

So as those markets link, then I think we’ll have a better feel for what a truly representative price is. At the moment, what I am saying is that what we’re achieving is low.

My expectations around demand driven by or around price driven by the supply demand balance in the longer term, and that is a very, very positive story, and doesn’t matter whether we're talking about coarse flake fines, domestic China or international market. The market balance driven by even conservative forecast of battery growth is distance move from its current position to desk relatively quickly and that will impact prices.

On delaying BAM, if there’s any impact on the timeline, no there’s no adverse impact in terms of contractual agreements or timelines for anything that is in place. Obviously the adverse impact is around the credibility and reputation that we’re endeavoring to built with the customer base and getting things done quickly as possible, provide an alternative to Chinese rigs and produce battery anode material, processing material, in particular.

So we’re endeavoring to do everything that we possibly can not to adjust that timeline.

Thank you all for your attention and participation today. And we look forward to a very positive third quarter and coming back to you in the coming months.

Thank you very much.