Syrah Resources Limited (SYAAF) Q3 2022 Earnings Call Transcript
Syrah Resources Limited (OTCPK:SYAAF) Q3 2022 Earnings Conference Call October 19, 2022 8:00 PM ET
Company Participants
Stephen Wells – CFO
Shaun Verner – MD and CEO
Conference Call Participants
Alex Ren – Credit Suisse
Mark Fichera – Foster Stockbroking
Operator
Thank you for standing by and welcome to the Syrah Resources Q3 Quarterly Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead.
Shaun Verner
Good morning and thank you all for dialing in today. With me on the call is Stephen Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Business Development and Investor Relations.
Today, Syrah released its September 2022 quarterly results covering operations, market conditions, the Vidalia Initial Expansion project and the outlook for natural graphite active anode material and their end-use markets. And we’ll use the slide deck we released today to guide through this discussion. It’s clearly been an eventful period for the Company and in some ways, that’s indicative of the EV and battery markets overall.
In short, there is a clear gap between the shorter lead times for battery manufacturing capacity development versus the raw materials to downstream processing capacity and localization that’s required to facilitate them. Customers, investors and other public stakeholders, I think, are increasingly aware of what that means for supply and for prices in future, and the broader macroeconomic and geopolitical trends, and making development and expansion more complex and in some cases more expensive.
Syrah has a significant incumbency advantage and is advancing towards becoming a large-scale vertically integrated natural graphite anode material supplier. The favorable upstream market setting for natural graphite is translating well to high demand for Balama products.
Summarizing the company’s position, we’re a key participant in the global graphite market already, net market is expected to grow by 4x over the next 10 years and the lithium-ion battery anode material market, which is expected to grow by 8x.
Syrah is the only vertically integrated natural graphite anode material supplier outside of China that’s producing anode material into qualification and producing upstream material that’s sold into the Chinese market. Now Balama natural graphite operation in Mozambique is unique in its place in the graphite industry with 350,000 tonnes per annum production capacity in a global natural graphite market of approximately 1.3 million tonnes per year currently.
We’ve spent a lot of time talking about Balama and for many years, it’s fair to say that the operation was too big and had potentially been constructed too early, but the market growth to support it is well and truly here. Potential ex-China competitors with significant volume are still some way from production, especially where downstream integration is part of their plans and Balama at 350,000 tonnes per annum is based on reserves with a 50-year mine life and their significant growth potential through the resource base.
Vidalia is the side of our downstream active anode material facility in Louisiana, and we’ve been operating there since 2018. We’ve had material in qualification and testing with auto OEMs and battery manufacturers for the last year and a half, and the first phase of commercial expansion is underway, which will deliver us 11.25 thousand tonnes capacity for active anode material production. We’re concurrently completing a definitive feasibility study, DFS, for expansion to 45,000 tonnes per annum underpinned by market demand by regulatory tailwinds, and as we’re announcing today, increased customer interest and further government support.
Syrah really has a unique position, the fact that we are the first vertically integrated natural graphite anode material operation in United States has been tremendously important for our development because it’s resulted in extensive engagement with potential customers. Our cost position from an OpEx perspective at Vidalia for anode material is roughly competitive with China, CapEx is more expensive, but there’s no surprise in that – in net CapEx challenge and that’s something that we planned for from the outset. And with Balama, in the upstream, the size of the asset is such that at full capacity will be a first quartile cost producer with significant expansion potential.
Governments, industry participants and markets recognized the key role of critical minerals such as graphite in facilitating transport electrification and energy storage development towards the objective of reducing global carbon emissions. And in August this year, the U.S. Government passed the historic Inflation Reduction Act of 2022, the largest climate-focused legislation ever in the U.S. The Inflation Reduction Act offers significant tax credits and financial support to end users of EVs and material producers to mobilize the development of domestic battery and battery raw materials supply chain and to accelerate the adoption of EVs in the U.S., and we expect that Vidalia active anode material will qualify as a critical mineral processed in the U.S. for the EV tax credit under this act underpinning demand for Vidalia products and that our U.S. operating subsidiary will also qualify for direct tax credits.
Moving to Slide 5. Our environmental, social and governance activities are fundamental to our company and every quarter that passes highlights just how critical this focus is and how critical our commitments are. Given the recent industrial action at Balama, I wanted to take some time here to talk about our approach and commitments in Mozambique, and ensure that the value to local, provincial and national communities in country are really clearly communicated.
Our commitment to local employee development is enormous of over 1,400 direct and contractor employees, 98% in Mozambique and 49% from the eight local host communities around Balama. We have a localization focus and a demonstrated history of skills and career development. Our two general managers in country and many of our simulators in Mozambique and we have invested heavily in training and development right from the outset of the projects.
We have an active union covering the majority of the Balama workflows and the company-level collective agreement ratified by the labor authorities in Mozambique covering our employment conditions. And since Balama’s inception, our total economic contribution to Mozambique has been over US$280 million most deeply committed to improving education, health and sustainable income generation in the district through our Local Development Committee, which has a number of capital and skills development projects.
Success at Balama has to come hand-in-hand with our employee community, and government relationships and given the very long-term nature of the asset, we are taking the time to ensure that we continue to get them right.
Moving over to emissions intensity. A critical panel review of our Minviro independent lifecycle assessment for our integrated operations was completed in the third quarter and Minviro has evaluated the Vidalia anode material in Balama natural graphite products have a 50% to 70% lower global warming potential in production processes compared with benchmarked Chinese supply routes, which currently account for most of global production. And this clearly demonstrates the differentiated sustainability credentials of Syrah’s natural graphite and our anode material products.
To further strengthen our ESG performance, we intend to undertake an independent third-party audit of Balama against the Initiative for Responsible Mining Assurance and the Standard for Responsible Mining under IRMA and that’s one of the most comprehensive and rigorous mining standards in the world. Syrah believes that in partnership with our key stakeholders, we’ve built a really strong foundation and we will be able to achieve an IRMA certification level and we’re highly focused on moving through that in the coming months.
Our health, safety and environment performance at Balama remains outstanding. Our total recordable injury frequency rate was one at quarter end and the Balama TRIFR has remained no greater than one since late 2019. Our TRIFR at Vidalia where there is obviously far fewer employees and contractors was 8.8 at the quarter end, and there were no lost time injury sustained at the site through the quarter with significant hours spent on the expansion project.
We’ll now move to the highlights for the quarter and I’ll hand over here to Steve to make some comments on the corporate position and the market context. Over to you, Steve.
Stephen Wells
Thank you, Shaun, and good morning everyone.
Significantly, for the quarter, we are pleased to report a positive net operating margin at Balama after C1 and C2 costs. This is a result of record sales of 55,000 tonnes for the quarter at a higher weighted average price of $688 per tonne and lower C1 total cost due to lower Balama production of 38,000 tonnes for the quarter.
In terms of Balama, we were able to produce at our minimum production rate target of 15,000 tonnes per month through July and August, and prior to interruption in September for a total of 38,000 tonnes for the quarter. With the three additional breakbulk vessels during the quarter, we achieved record sales of 55,000 tonnes, which were again materially higher than the previous quarter.
However, we want to continue to grow sales volumes and production, which was still somewhat constrained by container shipping and unexpected interruption in that area. Approximately 5,000 tonnes in shipments slipped into the first week of the fourth quarter, which otherwise would have taken total sales of 60,000 tonnes.
We will continue to execute further breakbulk shipments and increase container shipments to expand sales volumes as shipping and market allows. While C1 unit costs were higher than expected during part to these lower production volumes as well as fuel price inflation, basket pricing and sales volumes were higher. Shipping costs remain 3x to 4x our long-term historical average levels, however, container market conditions through the quarter end have begun to improve with freight rates declining and availability increasing.
Over the short to medium term, we expect shipping costs to moderate with the normalization in the shipping market while current price support for natural graphite based on market factors is strong.
Syrah finished the third quarter with a cash balance of US$136 million compared to US$168 million at the end of the second quarter. Total quarter cash outflows for Syrah were $33 million versus $37 million last quarter with approximately $28 million being related to investing activities.
Pleasingly, from a project perspective, Vidalia cash outflows increased from $14 million in the second quarter to $25 million in the third quarter with remaining cash outflow relating to Balama working capital and investment and corporate costs.
Syrah is progressing debt funding processes with the U.S. Department of Energy and DFC on funding requirements for both Vidalia and Balama respectively. We see a significant benefit to the Company from these funding processes and in July, Syrah entered into binding documentation for a loan facility of up to $102 million from the U.S. DOE to support financing of Vidalia’s initial expansion project.
The proposed loan is to be made under DOE’s Advanced Technology Vehicles Manufacturing loan program and the loan has highly attractive terms with capitalized interest and deferred debt servicing until October 2024, interest costs at long-dated U.S. treasury rates and a 10-year term. The Company and DOE are targeting the first advance from the loan within the December 2022 quarter aligned with the capital spending program for the Vidalia Initial Expansion project. This is the first loan from the ATVM program for 11 years and the first loan out of that program ever to a materials processing company.
Today, we are also very pleased to announce that Syrah has been selected for a DOE grant of up to $220 million to support funding for the potential further expansion of Vidalia to 45,000 tonnes per annum AAM capacity. The DOE grant program that Syrah has been selected for is aimed at developing a viable battery materials processing and battery manufacturing position in the U.S. with funding appropriate by the Bipartisan Infrastructure Law.
If successfully concluded, a DOE grant will be highly attractive to the Company and is expected to fund a significant proportion of capital costs for Vidalia’s potential further expansion to that 45,000 tonnes per annum AAM production capacity. We will work with the DOE to finalize the bonding funding agreement for this DOE grant.
Moving to Slide 7 and current marketing conditions. The end market setting in 2022 year-to-date continues to be outstanding with strong momentum in EV production and sales globally and with broad-based electrification of model ranges planned by major automakers this decade, the trend is likely to continue. To underpin this and the substantial energy transition, further large commitments are being made to develop battery manufacturing capacity across the globe, including in North America and regionalization of supply chain remains a major trend in the EV and battery supply chain.
Positive momentum continued in our key leading indicator, EV sales, in the third quarter despite the global economic headwinds. Global EV sales grew 68% in the quarter against Q3 2021 to approximately 2.8 million units with record sales of about 1 million units globally in September. EV sales and battery demand growth are driving demand for anode material as shown by total Chinese AAM production increasing to above 130,000 tonnes per month and achieving new monthly production records once again during the quarter. The trend in this area continues to be very strong and our broad interactions with spherical graphite processes in China and increasing flake imports demonstrates robust forward demand.
A strong market setting for natural graphite is evident with stable pricing even with natural graphite production in China returning to normalized output levels during the peak seasonal production period, but still well below typical annual production volumes due to events earlier in the year and therefore, likely lower inventories that would normally be the case heading into the fourth quarter.
As we move into the fourth quarter, Chinese domestic production typically seasonally shuts down, and with strong demand and absent higher inventory levels, higher Chinese natural graphite imports principally from Mozambique and Madagascar are likely to be required to satisfy demand ahead of the winter period of lower Chinese production.
Syrah’s forward sales orders are substantial at 70,000 tonnes alongside the record sales of 55,000 tonnes this quarter. Syrah’s forward sales orders indicate growing customer concern regarding Chinese natural graphite production availability and market balance.
Moving to Slide 8. This slide provides an updated perspective on regional battery manufacturing capacity pipeline forecasts and announcements. The growth ahead for the industry continues to strengthen, providing a very strong backdrop for the Company to increase production capacity utilization at Balama and a great setting for Vidalia’s various stages of expansion, which are increasingly supported by a government regulatory environment and of course, customers.
I’ll now hand you back to Shaun.
Shaun Verner
Great. Thanks, Steve.
Moving on to Slide 9, which outlines our long-term vision and pathway to growing Syrah’s downstream business to become a leading supplier of anode products globally, capitalizing on the benefits of vertical integration with the Balama graphite resource and operation. To succeed in this strategy, provision of production capacity in key markets is needed to underpin resilient and localized supply chains for customers.
During the quarter, we made very strong progress on a potential expansion of Vidalia to 45,000 tonnes of anode material production capacity in the areas of feasibility, customer development and in funding.
We announced a memorandum of understanding with Ford and SK On earlier in the quarter and today, announced an MOU with LG Energy Solution to evaluate significant anode material supply from Vidalia for both the initial expansion to 11,000 tonnes per annum and from a subsequent expansion to 45,000 tonnes per annum. Steve also mentioned the potential $220 million grant from the DOE earlier, which would cause a significant funding contribution to such an expansion.
The DFS for the larger expansion of Vidalia is advancing well with Worley Group being awarded a services contract to complete this study with our team. As part of the Company’s vision and given market fundamentals, Syrah is also progressing the evaluation of a large-scale anode material production facility in Europe and the assessment of strategic merits of such a development through a partnership.
By 2026, European lithium-ion battery manufacturing capacity is forecast to be almost 500-gigawatt hours per annum, which is estimated to require something like 450,000 tonnes per annum of anode material. Syrah’s broad engagement with the customer base already has highlighted concerns with input material production capacity being in deficit and a dependency on incumbent producers of anode material.
Moving to Slides 10 through 14 and an update on Balama, a little bit more detail around sales and logistics performance during the quarter. Key takeaways from the operational performance during the quarter were obviously the record sales of 55,000 tonnes, including the three breakbulk shipments and those sales being made at a higher weighted average basket price of $688 a tonne even during the higher production period in China. Production was 38,000 tonnes as Steve mentioned for the quarter and around our minimum target rate of 15,000 tonnes a month for the first couple of months of the quarter, but obviously, with September interrupted.
That interruption in September was through illegal industrial action and impacted total production and C1 costs over the quarter, and operational performance prior to that was excellent with really consistent product quality, stable grade and higher recovery of 80% during the quarter, and with 85% recovery achieved in the August production month.
As C1 costs FOB Nacala was $615 a tonne with $120 a tonne aggregate impact from the combination of fixed costs during September’s operational interruption, higher logistics costs from transporting a larger volume of Balama finished product volumes to Ford and increases in diesel costs since the end of Q1.
Balama’s net operating profit after C1 and C2 costs was positive as Steve mentioned for the quarter for the first time. Prior to the operational interruption, maximum finished product inventory positions due to the ongoing shipping constraints, constrained Balama operating at a higher than 15,000 tonnes per month production rate, that as we have emphasized over and again, it is – that shipping constraints rather than market conditions, which is holding back production.
The execution of the three 10,000 tonne Pemba breakbulk shipments to supplement Nacala’s container exports enabled that 15,000 tonne per month production rate through the operation in the first two months of the quarter. However, quarterly production overall remained constrained by maximum inventory positions at Balama and Pemba and the ongoing disruption in the global container shipping market. In short, we could have produced and sold significantly more products without these constraints.
Of the record, 55,000 tonnes of sales shipped during the quarter, we had 6,000 tonnes finished product inventory shipping subsequent to the quarter end as well. So a very, very strong period for sales. Our remaining finished product inventory at the end of the quarter was contracted to customers in the fourth sales order book remains very strong.
Our product quality was consistent with previous quarters with a stable grade above 95% and the plant recovery through the quarter of 80% was an improvement on Q2, and as I mentioned, we achieved 85% recoveries in August with new cyclone system in the secondary milling circuit fully commissioned from the start of Q3, there has been a steady improvement towards our 90% medium-term recovery target.
Coming back to costs. Our C1 costs trended higher during the quarter due to a number of unexpected and uncontrollable impacts. As I mentioned, there has been cost pressures across the sector given the persisting inflationary environment, including the state-based pricing of diesel costs for our power generation product drawing and shipping costs for inputs that come from outside of Mozambique.
We are currently evaluating potential operational cost savings to offset these inflationary pressures and note that C1 costs should trend lower, all else being equal with recovery uplift and other improvement initiatives, including the solar project. But most importantly, with increased production levels as shipping constraints reduce and we benefit from our fixed cost base. We’re still reviewing the Balama C1 cash cost guidance at a 15,000 tonne per month production rate given the very dynamic backdrop, particularly around diesel prices and we’ll provide further information in due course.
Digging a little deeper into the disruption during the end of September, Balama interrupt – operations were interrupted by illegal industrial action, driven by a small contingent of local employees and contractors. With work stoppages, disrupted access to site and out of caution for the safety of Syrah’s employees and contractors, Balama operations were halted and at one stage, the Company’s workforce temporarily moved from site.
After the end of the quarter, we prepared operations for restart with employees and contractors returning to site and camp, preparing for production and logistics movements recommencing. Syrah’s extensive engagement with employee representatives and the relevant Mozambique and government authorities endorsed the Company Level Agreement and the renewal process around that would be Internal Union Committee is the correct process for matters regarding Balama employment conditions.
The disruption impacting full operational restart and logistics movements has continued into the start of this quarter. Currently, the plant is fully ready for operational restart and we’re working through the remaining impediments. Company continues to engage with employee and contractor labor representatives and the district and provincial government authorities to drive a resolution of the immediate challenges and towards the renewal of the Company-level agreement and ensuring as well that any grievances are managed through the correct internal and/or regulatory channels.
Our focus, as I mentioned earlier is on emphasizing likely employee development, long-term career development and a mutually beneficial library environment. Despite the frustrating interruption intermittently impacting almost one month’s production, we will take the time to get this right for the long term. We remain deeply committed to ensuring value for all our stakeholders through this process.
Moving to Slide 13, which contains some further detail on the graphite sales and marketing side. We reported a significant improvement in and record sales volumes in Q3, incorporated three spot breakbulk shipments from Pemba. And again, sales would have been higher if it wasn’t for those container market – container shipping market disruptions and the interruption to Balama operations because there is a very strong underlying demand picture.
The breakbulk shipments from Pemba will continue to supplement container shipments and that’ll enable overall natural graphite shipments of up to 20,000 tonnes a month or more. We’re seeing very strong demand and stable forward contracting with customers, now forward sales book remains very healthy at 70,000 tonnes, even with increased sales in Q2 and peak Chinese natural graphite production seasonally, and that demonstrates the clear market growth and customer concern with supply ahead of winter in the period of lower Chinese production with low inventory levels and considering demand growth.
Given the market backdrop, the demand for Syrah material and changing market dynamics in China, we also implemented a new commercial relationship to deepen our supply chain and servicing options in China and enable us to reach a greater spread of potential customers and this commercial relationship is expected to provide further year-around volume benefits in future.
The weighted average sales price increased to $688 a tonne CIF in the quarter reflecting the stable and strong market conditions with fines accounting for 83% of product sales. Fines spot pricing was stable in July and August compared to last quarter and increased in September ’22 with record downstream anode market demand. Coarse flake prices outside of China have remained strong, and that’s primarily due to ongoing supply disruptions including from the Ukraine and Russia.
Sea freight rate volatility and surcharges continued with Syrah’s average shipping unit costs during the quarter at almost 4x the long-term average despite the recent indications of improvement and we have seen that the global container freight index has retraced more than 50% from its peak in the short space of time over recent months, and we strongly have the view that while sea freight rates will normalize, the structural demand increase for natural graphite will see pricing generate strong margins for our business.
Moving on now to Vidalia on Slides 15 and 16. We’re making strong progress with the Vidalia project and in our strategy to become a vertically integrated natural graphite anode material supply alternative for the ex-Asia markets. We are a first mover in this integrated downstream anode market outside of China and we’ve created a differentiated position at Vidalia that’s not easily replicated.
Following the announcement of a final investment decision on the initial expansion of Vidalia in February this year, detailed engineering, engineering completion, equipment fabrication and deliveries, and onsite construction activities are well underway. The project is being overseen by our high-caliber team alongside Worley Group.
At the end of the third quarter, detailed engineering was 89% complete and will be finished in the current quarter enabling required equipment fabrication and construction to progress in line with the schedule. Procurement for all key construction activities and equipment is substantially complete with contracts for more than $130 million awarded including for the major mechanical and equipment work packages and the project is on budget after the completion of the majority of procurement activities with a significant portion of the project contingency remaining unallocated.
The key construction activities undertaken during the quarter were piling and fencing, buried water services, power connections, concrete foundations and slab pouring, mechanical, structural steel and substation deliveries, piping manufacturing and preparing for delivery and installation of major equipment, including overseas orders. All the overseas fabrication is tracking as expected and delivery of this equipment is on schedule and that delivery has been further facilitated by improving shipping market conditions.
Construction activities in the December quarter will focus on the completion of foundations, mechanical and structural steel delivery, steel erections for buildings, piping and manufacturing, and delivery and installation of major equipment.
Construction completion and commissioning in the start of production for the 11.25 thousand tonne anode material facility is targeted for the September 2023 quarter with an 18-month ramp-up period to the full anode material production rate.
Our offtake agreement to supply anode materials to Tesla from the Vidalia facility is core to this initial expansion and during the quarter, we further announced a non-binding MOU with Ford and SK On to evaluate supply from Vidalia to their BlueOval SK joint venture. And today, we announced the non-binding MOU with LG Energy Solution to evaluate supply of 2,000 tonnes of anode material from Vidalia commencing from 2025 and increasing that to at least 10,000 tonnes of anode material with Vidalia’s potential expansion to 45,000 tonnes. Under both MOUs, we’re targeting finalizing a binding agreement by the end of calendar year ’22.
We are strongly advancing further commercial and technical engagements with other target customers on the potential to supply anode material from Vidalia and qualification processes in iterative testing programs are progressing well. Importantly, we also finalized a binding offtake with Hiller Carbon to supply all the byproduct micronized spherical graphite fines from the 11.25 thousand tonne facility for an initial five-year term and with extension options under that contract.
Hiller is a leading supplier of specialty carbon products and other minerals and a long-term partner of Syrah already in the U.S. We have a significant future opportunity with the combined position at Vidalia and the globally significant graphite resource in operation at Balama. Tesla’s option to offtake additional anode material volume, the MOUs with Ford, SK and with LG, broader customer interest and market evolution continue to highlight the requirement for significant localized supply of anode material in the U.S. and other ex-Asian markets.
Our assessment and test work for the DFS on further expansion of Vidalia to 45,000 tonnes continues with the contract that we have awarded to Worley Group for this work. The DFS is planned to be substantially completed by the end of 2022, enabling Syrah board assessment in conjunction with the development of customer and financing commitments.
Scaling Syrah’s downstream business is underpinned by Balama and the resource and reinforcing why we are so intent on continuing to develop labor and community relations for long-term success. The opportunity to consume a significant proportion of Balama’s production at Vidalia over time and to potentially expand Balama to supply third-party customers further are both important factors in the overall upstream supply-demand balance. Even at an expanded 45,000 tonnes at Vidalia, only approximately 25% of Balama’s current production capacity would be utilized internally.
So to finish up on Slide 21, EV sales growth, a constructive demand environment for anode and Chinese supply chain disruptions are driving strong demand and strong pricing for Balama products. With increased shipping optionality and expected freight cost reductions, the release of inventory constraints and strong demand, we should facilitate increasing Balama production to – towards the target of 20,000 tonnes per month and enable higher sales volumes.
We’re intently focused on continuing to develop Balama’s labor relations environment and to ensure long-term opportunity for local employees and communities, and overall value growth in Mozambique. And construction of Vidalia’s initial expansion is progressing within schedule and budget with the pathway to 45,000 tonnes per annum at Vidalia being derisked concurrently. The DOE and DFC loan processes are progressing well and these processes along with the DOE grant award announced today clearly highlight the strategic importance of Syrah’s integrated operations to the EV and battery supply chains.
The current market and Syrah’s progress demonstrate the unique position we occupy the largest global integrated natural graphite operation at Balama and the most advanced option for a vertically integrated supply of natural graphite anode material outside Asia and we look forward to keeping everyone up to date with the Company’s progress.
And with that, we will move to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Alex Ren from Credit Suisse. Please go ahead.
Alex Ren
Good morning, Shaun, Steve and team. Congrats on getting showered with the money from the U.S. government. Great news. A couple from me please. On that potential $220 million grant, so what are the conditions that Syrah needs to satisfy? Could you give us a bit more color on that? And if successfully granted, when will you start receiving it? Is that contingent on the first shipment from stage one?
And then on that $100 million loan for Vidalia stage-wise, first advancement in December quarter, so how many installments are there? Is that just flowing through each quarter? I’ve got more questions but I will circle back. Thanks.
Stephen Wells
That’s all right. Thanks for the question. I’ll take the grant first. Literally we’ve announced that this morning and it’s – and we’re really pleased to be a part of the list and be awarded such a significant amount. That’s the Phase 3, which is obviously the further expansion to 45,000 tonnes a year and then beyond the existing construction project. And then it will take a reasonable process of negotiation of the terms, conditions around the ground. So we’ve obviously applied for it, we obviously know the amount that’s been awarded, but the rest of it is very much still to come.
In terms of the DOE loan itself, so that is for the Phase 2 or 11.25 thousand tonne facility, and
effectively like most project financing loans as we need the funds, we will draw down on them, effectively a monthly process, if you will, and that’s the first time that that is expected to happen is through the December quarter. Does that answer your questions?
Alex Ren
Yes, absolutely. Thank you. And then operational status on Balama. So when do you expect production to recommence given the inventory is out now down to – it was 14,000 tonnes by end of September. So basically, it’s just one breakbulk shipment, right? Does that mean the entire Balama is currently in full halt? And in terms of both site production and logistics, if – do you know what the monthly cash burn rate is? I’ve got one more, so I’ll circle back. Thanks.
Shaun Verner
Yes. So the interruption to production and logistics continues at the moment. As I said, from the periods that we advised, staff were coming back to Balama and we did a lot of work on site to ready the plant again for full production after a relatively quick stop. But we have not recommenced production at this stage. All efforts and intense focus is on reaching resolution to allow that to happen as quickly as possible.
And as I said, we are constructively engaging with labor representatives both employee and contractor, and the relevant government authorities from a district provincial and national level around this.
So we do not have a timeline to provide today, it’s a dynamic situation, but you can be assured that the soonest possible resolution is the highest focus for the company. And at this stage, we’re not making any further comment around cash burn or potential impacts at this point in time.
Alex Ren
Understood. And last one from me. So, Tesla qualification progress and also could you give us a bit more color on that offtake discussions? It sounds like the market is craving for ex-China supply, right? But how come there’s still around one-third of all contracted volume for Vidalia Stage 1? I would’ve thought customers would be jumping on board to sign MOUs at least with you guys.
Shaun Verner
Yes, thanks. So we have clearly a set of commercial processes underway, which includes the balance of material from the first phase expansion and a further potential expansion to 45,000 tonnes and the level of interest is indicative – well, the MOUs are indicative of the level of interest and the level of engagement.
As I mentioned, there are other commercial processes as well underway and we are assessing the best combination of potential options, not just for the balance of Phase 2, but also how that might link to an expansion to the Phase 3 volume of 45,000 tonnes. So it is definitely a period of very strong interest.
As I’ve mentioned previously, the level of understanding about market dynamics for the balance in natural graphite from an upstream perspective, but particularly for localized supply of anode material was already improving significantly. And I think the overlay of potential benefits coming from the Inflation Reduction Act has only exacerbated that level of interest and intensity of interaction.
So we’re very comfortable with the pace at which we are finalizing and moving through commercial arrangements for Q2 – sorry, for the Phase 2, 11.25 thousand tonne facility and phase three 45,000 tonne facility potential.
Alex Ren
All right. Understood. Thanks, team. Congrats again. Cheers. That’s it from me.
Shaun Verner
Thanks.
Stephen Wells
Thank you.
Operator
Thank you. [Operator Instructions] Your next question comes from Mark Fichera from Foster Stockbroking. Please go ahead.
Mark Fichera
Yes, hi guys, congratulations on the Grant and the LG announcement. Just a couple of questions from me, firstly with the Vidalia Phase 3 expansion so should the Grant be binding. Can you also still apply for the DOE loan, similar to what you’ve done with Phase 2 or does the fact that you’ll be getting the Grant, does that preclude you from clients for that loan if you could just clarify that. Thanks.
Shaun Verner
Mark, I think under the Inflation Reduction Act and with the level of policy support that’s moving ahead in this space, there’s not just loans and grants, there’s also tax incentives and various other items that are potentially available. The way in which those interact and the degree to which multiple items can be pursued is not yet fully clear but we obviously prioritized the grant program and the potential for a grant allocation as something that was very attractive to potentially get onto the balance sheet.
So that was a focus obviously the DOE ATVM loan for Phase 2 is not impacted by the grant allocation to Phase 3. But I think there’s lots of water to go under the bridge to determine what other interactions around loans, grants and other incentives might still be there to work through.
Mark Fichera
Sure. Okay, thanks. And in terms of the grant going-binding what timeframe are you sort of looking sort of that closure?
Shaun Verner
I think as Dave said earlier it’s very early in this process, the allocation and the announcement process has only just happened. So the timing and process for next steps it’s something that we’ll learn more about in the coming weeks and months.
Mark Fichera
Okay. And one more from me just on the Pemba bulk break shipments, obviously you did well, you did three shipments during the quarter, can you do subject to Balama getting back to restart, how many could you possibly do more than three breakbulk shipments through Pemba, can that be four or five, I was just wondering to get a feel for how that can be optimized.
Shaun Verner
Yes, I mean there’s no logistical or timing constraints that means you can only do one a month, it comes down to what is the balance of customer allocations because is a far smaller number of customers who take breakbulk compared to container and the fixed cost base that we have in place through our transport and cross-dock facility for the container shipments through Nacala.
So it really is an ongoing assessment of the best allocation both for maximum volume, but also the balance of cost.
Mark Fichera
Okay, thanks.
Shaun Verner
Thanks Mark.
Operator
Thank you. There are no further questions at this time, I will now hand back to Mr. Verner for closing remarks.
Shaun Verner
Thank you obviously, we will keep everyone updated very closely around progress at Balama and as I said, that is absolutely the primary area of focus for us to ensure that we are back to operations and logistics movements as quickly as possible. So thank you for listening in today and we look forward to keeping everyone updated. Thank you.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.