Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Lynas Quarterly Investor Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas. Thank you. Please go ahead.

[Unknown Executive]

Good morning, and welcome to the Lynas Corporation briefing for the September quarter of FY '21. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director; and joining Amanda on the line are Gaudenz Sturzenegger, CFO; and Andrew Arnold, General Counsel and Company Secretary.I'll now hand over to Amanda Lacaze. Please go ahead, Amanda.

[Amanda M. Lacaze, MD, CEO & Director]

Thanks, [ Jen ]. Well, good morning, everybody. Delighted that you've been able to join us this morning as we talk about our first quarter results. And of course, I'm very pleased with the results that we've been able to release today.We've set ourselves a number of targets at the beginning of this quarter, I mean, of course, always to ensure that we meet our customer needs. But operationally, we really wanted to ensure that our restart after a very -- any shutdown was maintained safely and that we also achieved stable operations because we know that that's good, both the throughput and also the cost. We wanted to ensure that we were matching production to customer needs and not creating any unnecessary supply side pressure in the market. And we set ourselves to target of ensuring that as we started our path with the prolonged shutdown, we would capture cost efficiencies and perform at our best cost levels and that we've demonstrated during the period of time we've been operating our various facilities.We set ourselves the target of meeting actually a profile in terms of cash generation as we progress with our growth plans. We wanted to make significant progress on our Lynas 2025 initiatives, and we wanted to continue to advocate for industry development in a positive and affirmative way. And I'm pretty pleased because, really, as I look at my checklist, I'm able to put ticks against just about all of those things.So in terms of operations, certainly, in time of COVID, there are certain imperatives in the way that we operate. Of course, the health and hygiene protocols are nonnegotiable. And even as we, at present, see a flare-up of cases in Malaysia, fortunately, none of them in -- no significant numbers in the state of Pahang where we operate. But we are ever alert and ensuring that our people understand our expectation for them that we'll have appropriate testing regimes. And of course, we have the appropriate protocols within the organization to ensure that we are creating a safe environment.We've mentioned, I think, at the half year that we put a new structure in place. It's certainly working very well with Kam Leung heading up our upstream operations with full accountability for our West Australian operations, both Mount Weld and, of course, the Kalgoorlie Project; and Pol Le Roux taking accountability for our downstream operations, including a quantum facility and other customer-facing activities. This is working well, although, I think both of them feel that there's certainly plenty of work on their plate.We have been able to manage some of the issues, which come from the prolonged shutdown, any chemical plant always will sort of let you know that it likes to be run continuously. And so we're on a prolonged and sudden shutdown. But the team in Kuantan, in particular, I think, has used their time very wisely and ensured that we've implemented a proper process to really understand what, if any, effects there have been from being shut down.It's a delight to have returned to positive operating cash position, and it is in line with our internal profile that we used as we sized the equity raise for the Lynas 2025 foundation project.Of course, the big thing we did in the quarter with respect to Lynas 2025 was -- is the capital raising of $425 million. That secures funding for the key foundation projects associated with Lynas 2025. And the Kalgoorlie project team has made really excellent progress with the [ sublease going ] with the -- for the Kalgoorlie-Boulder and the general purpose fleet for the site.We've had a decision from the Department of Agriculture, Water and Environment. That's the Commonwealth department that is not a controlled action under the EPBC Act, and that means the project will be regulated by the Australian State Regulators. And of course, as people know, we signed the U.S. government contract. For the Phase 1 development of the proposed Heavy Rare Earth plant.The other thing really is about continuing to advocate for industry development. I think that barely a day goes by without some commentary about geopolitical matters, particularly as they relate to Rare Earth. I think that many of us have spoken before about the effect of COVID-19 in reminding any end users that singular supply chains can be risky. And then, of course, we continue to see from various different government announcements and statements.We're really delighted to see critical minerals and Rare Earths being part of the Australian government's advanced manufacturing policy. And we are also pleased to see and we feel we have a part to play in continuing to engage with Australian, U.S., Japanese, European government on the importance, not only of having the resource and initial processing of Rare Earths that actually in the development of downstream industries, which will give end users confidence to open outside and develop outside China's supply chain.So I was just talking to one of my colleagues and saying, to some extent, it's a business-as-usual quarter and [ intendedly I ] like to be back to a business-as-usual-type profile, and we look forward to continuing to build on a solid foundation for our -- of our first quarter this year.So look, think the report, and I'm sure everybody on the call has read it, is pretty self-explanatory. And so I'm quite happy to take questions from anybody on the call now.

[Operator]

[Operator Instructions] Your first question comes from the line of Jack Gabb from Bank of America.

[Jack Gabb, Associate]

My first question is just on current demand. Did you see a pickup in demand over the quarter, which is what the price increase would suggest? Or has it stayed relatively constant? And secondly, at this stage, do you envisage maintaining operations at around 75% of capacity into the second half of this financial year?

[Amanda M. Lacaze, MD, CEO & Director]

Thanks, Jack. So demand is holding up reasonably pretty well. When you give -- when you take into consideration the effect on so many industries of the COVID-19 pandemic, 2 key drivers of NdPr demand and the latest stats out of China say demand has held up there as well, of course, electric vehicles and wind turbines, and both of these have sort of continued to grow, notwithstanding the effect overall on automotive, particularly the automotive industry as a result of the COVID-19 pandemic.We are, at present, remaining at the 75% level, but we are tracking this on a weekly basis and looking at -- with our customers and our distribution partners, so just inventory levels, how they're being affected by demand. For us, it's pretty easy to sort of -- to ramp up. We know we have -- we know when we have done this. And the only thing that we need to factor into this is that we do have a planned shutdown for one of our kilns this quarter.So we would expect that we'll sustain about the 75% at least for this quarter. But I'm quite pleased with the demand picture. But the world is still quite uncertain, so I'm loathed to make any affirmative forecast on increasing production in the second half of the year.

[Jack Gabb, Associate]

Yes. Understood. And just I guess a follow-up on that, although it's not going to be needed this year, can you give us just an update on the permitting for the increase to sort of above 7,000 tonnes produced NdPr in Malaysia? I think you were going to apply for it even that it wouldn't have been needed this year.

[Amanda M. Lacaze, MD, CEO & Director]

Yes. So actually, bearing in mind once again that there are many matters on the place of the Malaysian government at present, many of them COVID related, the breadth of engagement is really sort of limited to those things which are more time critical right now. So our primary engagement is related to the permitting and the progression of the PDF, and I don't, at this stage, have an update to provide on the processing limit.

[Jack Gabb, Associate]

Okay. No problem. And just last one before I pass it on. You talked about, obviously, CapEx starting to step up over the next few months on the Lynas 2025 plan. Can you just give us a bit more guidance on CapEx for this year and into next year as well if you can?

[Amanda M. Lacaze, MD, CEO & Director]

As we said in the -- well, maybe the capital raise, we see the significant step-up actually occurring in next financial year, but we would expect to be ramping up towards that level. But until we start sort of substantive work from site, most of the CapEx is going to be related to things like progress payments, for example, on the kiln. We didn't sort of pay for all of that upfront, so we got a series of those payments. We've let one of our other long lead time tenders, but we would be talking -- but we are talking about sort of picking up to probably in the range of $13 million to $20 million a quarter from our historic sort of level until we hit next financial year when it's going to sort of -- that's when we will really start to spend the money.

[Operator]

Your next question today comes from the line of Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

Just a follow-up on the 75% decision this coming quarter. I understand you've just highlighted you've got a planned maintenance shut on one of the kilns. I'm just wondering if there was an opportunity to think about trying to produce as much as possible under your licensing constraints, which I estimate is about 5,600 tonnes in a calendar year of NdPr. Now I know you don't want to disrupt the price on the market and it can be sensitive. But is there not an opportunity to build inventory that might be beneficial in future periods because if you don't fulfill your constraints, those tonnes could be lost forever?

[Amanda M. Lacaze, MD, CEO & Director]

Yes. That is certainly one of the things that we factor into our thinking. At this time, as I said, we can swing in and we can swing in train 4 -- 3 trains -- 3 kilns and 3 SX5 trains. The kilns, 3 of them can actually fill a bit of stock over time. But it is -- the kilns have to be shut down every now and then for these sort of relatively significant maintenance programs, and we already had that scheduled into this quarter. And we actually won't be changing that schedule. But yes, we actively consider this every week and decide what is going to be the best outcome both in terms of production and funding outcome. And at this stage, we expect that we will stay pretty much at that 75% level in this quarter.

[Daniel Morgan, Director and Analyst]

And that license constraint for each calendar year, that's a use it or lose it, I imagine, that the production you didn't do this year, that doesn't carry over, I presume.

[Amanda M. Lacaze, MD, CEO & Director]

Sure. Sure. That's right. So I have say, to your point, and we absolutely had as recently as yesterday morning, when we had a monthly significant sort of meeting on this, as recently as that, we had a conversation about it. On balance, right now, we think that we are better to continue to run at the current rate.

[Daniel Morgan, Director and Analyst]

Okay. Shifting to the growth options, so the Kalgoorlie option that you're exercising. I'm just wondering if you could just remind us of your latest thinking with regard to what's being built in Kalgoorlie and what will be built in Malaysia. So my understanding is you're going to expand production from 7,200 tonnes per annum to 10,500. Obviously, there's an incremental portion of solvent extraction that is in that thinking. Where does that solvent extraction step take place?

[Amanda M. Lacaze, MD, CEO & Director]

Yes. So isn't it a good thing it's still 5 years until 2025 because we still have quite a few moving parts from this? So the first piece, and this is why we sort of refer to them as foundation projects, we had to have the kiln operating in Kalgoorlie. It has been engineered and designed in such a way that it can relatively easily -- I guess my operating team would have me ever saying relatively easily, but anyway, be scaled up. And the throughput is actually a function of the [ com ] that we've put in the front end.Then with respect to additional separation capabilities, we're assessing a number of pathways for that. One is actually reconfiguring some of the flow sheets that we have in Malaysia. We have a quite well-developed concept by our technical lead, which would see us be able to significantly lift throughput by reconfiguring some of those assets. Of course, as you are also aware, I think the U.S. government has 2 tenders on foot at present. One is for Light Rare Earths and the other one is for Heavy Rare Earths, and we have responded to both of those.In terms of how to get to the extra, as I said, we also have a number of pathways there. Kalgoorlie is the only facility, [ so pricing ] and leaching and we've got some options with respect to the way that we feed it. As part of the 2025 projects, we configure Malaysia, so it can receive mixed Rare Earth concentrate and then maybe other sources of mixed Rare Earth concentrates that we use for separation as well. So we have a number of different pathways to achieve the uplift from the 7 (sic) [ 7,200 ] to the 10,500 and -- but is -- they're all sort of still -- some of them are still under assessment. And we certainly have time to ensure that we pick an optimum mix of those options.

[Daniel Morgan, Director and Analyst]

And just the last question. The -- you highlighted in your quarterly, you're scheduled to complete a feasibility study for the Department of Defense on the tenders that they've made during this fiscal year. Are you going to be sharing the outcomes of that with us on the market? Or is that something that might be commercial in confidence with the Department of Defense?

[Amanda M. Lacaze, MD, CEO & Director]

We will -- Andrew may like to answer that question more than me. Let's suffice to say that when you deal with government, you have a conversation with them about what stage announcements are reasonable and not. And when we look at it, we look at our duties under continuous disclosure. And so therefore, clearly, if we have something which is relevant and the continuous disclosure rules, then it will be shared with the market.

[Operator]

Your next question today comes from the line of Reg Spencer from Canaccord.

[Reg Spencer, Mining Analyst]

Just a few from me. First one is just on pricing. That's slightly lower priced Q-on-Q. I presume reflects a differing product mix into those different markets. Is that a fair assumption or presumption?

[Amanda M. Lacaze, MD, CEO & Director]

Sure. Product mix is always significant. The other thing is that as the price -- as we've shown, the price increased over the quarter. We always have a bit of a lag either when the price goes up or when the price goes down because of the contract terms we have with our key customers.

[Reg Spencer, Mining Analyst]

Understood. Next question's...

[Amanda M. Lacaze, MD, CEO & Director]

Sorry. The other thing, Reg, just the price for NdPr has strengthened and price for SEG has sort of held fairly stable. But cerium pricing where demand has sort of dropped out of the market because it's by no means as strong as it was previously.

[Reg Spencer, Mining Analyst]

Understood. Next question was a little bit more high level. Given the still significant uncertainties that we all face with the pandemic, what do you guys consider the key risks to meeting your 2023 time lines for delivery of the Kalgoorlie project? And I guess what are those key risks that might be presented or driven by the impacts of the pandemic?

[Amanda M. Lacaze, MD, CEO & Director]

Gosh, so the project team has a toll paper. I think it runs to several pages of risk, and that is not meant to be alarming that there's that many risks. It's meant to be reassuring that those risks have been properly considered and mitigating strategies put in place. Certainly, the longer the WA maintains closed borders, the less flexibility there is around things like labor. And I think that we see this, and the Minerals Council has talked to sort of labor risk as mining and minerals industry, in particular, picks up. So it's certainly one of the reasons why we are progressing -- well, under any circumstances, we will progress as quickly as we can. But it's certainly something that we want to be ahead of the curve in terms of being able to access the right skills and capabilities.Clearly, we have a fair bit of engineering and fabrication of materials, which will be imported into Australia. A lot of those are coming from Malaysia, actually, where we've established some very good relationships. And while the -- Malaysia is facing a second wave from COVID at present, it is primarily driven out of Sabah, so non-Peninsular Malaysia. But there could be disruptions to materials or equipment that we seek to import. Other than that, there shouldn't be too much, Reg. I mean, clearly, there's a whole -- there's a plethora of risks. But generally speaking, we believe we have good approaches to mitigate those risks.

[Reg Spencer, Mining Analyst]

Okay. Look, it is a reasonably long time away, and you do have quite a fair bit of runway there. But what would your fallback position be if there was something that might not necessarily have been fully within your control, some kind of pandemic-related impact that prevented you from delivering Kalgoorlie. The current limitations of your existing operating license in Malaysia, do you think that you would have some kind of fallback position or leeway with the Malaysian government on that front if you were presented with that issue?

[Amanda M. Lacaze, MD, CEO & Director]

Reg, I'm sorry. I'm just going to give a politician's response to that because that is so highly speculative that I think what I would say to you is that our Kalgoorlie project is now fully funded with allowance for a -- for what would be regarded as a reasonable contingency. And we have a buffer based upon our profile of our business, which is, [ the world term's, clustered ]. We actually have a cash buffer in there as well.So the project is funded. The project schedule and its milestones give us -- given that we meet those milestones, and we have good track record on meeting milestones, give us once again a significant timing buffer to allow us to get the plant not only started up but actually ramped up to operating at -- stably at target rates. So I think that, to your point, the mitigants that we have here is that we actually have built into our planning, both funding and timing buffers, which will allow us to deal with unforeseen effect.

[Reg Spencer, Mining Analyst]

Okay. No, that's fair. And one last one from me. There's been some recent media speculation about the potential introduction of export controls in China. I presume you guys are monitoring that situation very carefully. But have you guys got any comments on what's happening there?

[Amanda M. Lacaze, MD, CEO & Director]

I guess one of the things that I would say is that, as we look at what's been put in place, it reflects, again, sort of Chinese focus on not doing things which are just an atom bomb to kill an ant. So what they've done is they've created a legal framework, as we understand it. It's actually focused on, as we understand it, being able to be a bit selective in how they would apply any restraints. And I think that, that is a reflection of the fact that Rare Earths are an important part of the Chinese economy, and they're not going to make decisions which have unintended negative consequences.But it's not just about Rare Earths. As we understand it, the policy is much broader than that. But it is -- from what we understand, it will allow them to more effectively target where they might put restrictions as opposed to just general restriction.

[Operator]

Your next question today comes from the line of Dylan Kelly from Ord Minnett.

[Dylan Kelly, Senior Research Analyst]

Most of my questions have been answered already. Just want to dig into the cost base. So at $57 million for the quarter, it's only up very slightly versus the last one despite the huge increase in volumes. Can you just walk us through what are the moving parts of that and how repeatable is it, particularly referencing your comments around an internal budget around cash generation, how you -- how we should think about it rolling forward?

[Amanda M. Lacaze, MD, CEO & Director]

Yes. Sure. So first of all, the previous quarter's number was pretty awful. So as benchmark, it's not a great one because, of course, when you're talking in cash terms, we had a fair bit of carryover in terms of payments into that quarter for materials, particularly chemicals, that we had purchased in the prior quarter. That's not such an effect here because we restarted in May, so we had 3 months' worth of purchases for the quarter.But there's a little bit of always timing fluctuations on when payments are made and things like that. I think that our last payment for hydrochloric fell across the quarter and that sort of stuff. But we're pretty confident about -- and so I think that looking at costs is always much more sensible to look at them when we provide the half year results as opposed to the quarterly cash picture. And we're confident that we have established a stable cost base, and we've brought it down from where we were performing last year.

[Dylan Kelly, Senior Research Analyst]

Okay. I won't go into the comments around running at your current capacity or current run rate. Could you just walk us through what's going on with the NdPr mark at the moment? I mean, yes, we've seen a price bump. Is this -- do you see this as being supply-driven at the moment with Chinese supply coming off at the end of this sort of 5-year plan process and putting limits on export controls? Or how do you -- what's happening with supply in this instance?

[Amanda M. Lacaze, MD, CEO & Director]

I actually think that this is primarily more reflection of the fact that $33.80 per kilo of NdPr is a really low and unsustainably low price than most in the industry. And so if you look sort of historically at what's happened when the price goes down to those sorts of levels, it does tend to move back up to more sustainable levels. I think a lot of Chinese firms are relatively comfortable in that $40 to $45 range. And so I think rather than any sort of big complexity around supply and demand, I think it has simply got to levels that were causing too much pain for a lot of the suppliers.

[Dylan Kelly, Senior Research Analyst]

Okay. Fair enough. And just on the comments around different products. I'm just noticing there's a bit of a breakout in, say, the different prices for the separated Nd and Pr, particularly on the Nd relative to the mix. Can you just -- do you have any insight there to understand how that's come about and how the separated trains are currently operating?

[Amanda M. Lacaze, MD, CEO & Director]

So it's funny isn't it? And I think this is one of the things I'd make a broader point. It's one of the reasons why we talk about ourselves as a Rare Earth company, not an NdPr company. And when you look at sort of -- generally, a lot of people really want to focus on NdPr, but -- and it is without doubt the king of the Rare Earth heap at present. But things change and they change according to different technologies and different approaches. And we've all talked about how 15 years ago cerium was king and Nd was byproduct.So even I think 2 or 4 years ago, when we first started the process of sizing sort of that NdPr separation, Pr sold at a premium and Nd sold at the same price as NdPr, today, Nd is selling at a premium and Pr is selling at about the same price as NdPr. And that's simply a reflection of demand across different segments within the market.So this is why we need to be able to make everything that we make as a reliable and high-quality way because the uses change and reuses change over time. The train 2, which does the Nd and Pr separation, I think we've always said that it operates at slightly lower rates than the others. But it's stable, and it's producing at target rates. We're not proposing at present to increase the amount of separated Nd that we produce, but once again, it's one of the things that we just keep watching very fast.

[Operator]

And your next question today comes from the line of Trent Allen from CLSA.

[Trent C. Allen, Research Analyst]

This is Trent. Congratulations on a good recovery this quarter. Just -- you touched on this with some of the other callers already. Just back on Malaysia. Is there any update about progress of the PDF there? Because it's really your next deliverable. Also, can you remind us what you need to do by the deadline? Is it a full permit and a plan? Or do you need to be pouring concrete? Also remind us what the deadline is. And just reflecting Reg's question about Kal, what are some of the key risks around delivering that on time?

[Amanda M. Lacaze, MD, CEO & Director]

Trent, thanks for the questions. So the progress on the PDF in Malaysia, just milestones again. The milestone is that we need to have commenced construction by early March 2021. To have commenced construction, by definition, we need to have all of our approvals and permits in place. We're working -- our team there is working very productively with now the 2 separate departments that are involved in that permitting processing.So MOSTI, which is the Ministry of Science, Technology and Innovation. The minister during the quarter actually visited the proposed site and also visited our site in Kuantan, which was really pretty exciting. I'd request you to probably put that in the report. This is the first ministerial visit that we've had in a very long time. I couldn't get the previous minister to come and visit the plant. And we know that when we get people to the plant that the quality of the work and our people is so evident that many of what may have been held as sort of concerns from a distance fall away.So we are working very effectively with MOSTI and also with the Department of Environment and just methodically working our way through the various approvals that need to be completed and I should also say also with the state government because, of course, it's a land issue and requires state government and local government sort of approval as well. So just the same thing as really Kam and his team are dealing with the WA, you just got to move through each of these gates, and we just do our work sort of to ensure that we meet the dates rather than if we don't do our work well, then that could be civil servants sort of cause to keep coming back and asking more questions.The process hasn't been significantly compromised by COVID. Although I would say that everything has the potential to just take a little bit longer. And with the second wave, the civil servant has just all been set home again for a couple of weeks because there have been a number of cases pushed [ dry up ], but at present, we see ourselves on track without any problems.Really, in terms of Kal, like I said, we've got our critical path items already on order. We're confident with the providers of that progress on the engineering design and creating packages of work that we're going to be [ leading ] to various providers, hopefully, many of them local. Reg started putting the fences around the site during this call -- I'm sorry, [ Jeff ], [ Jeff ], it was, started putting the fences around the site this quarter. So yes, there are all the risks that you would expect with a major project, but we have, we believe, firmly mitigated with our approach.

[Operator]

Your next question today comes from the line of Jack Gabb from Bank of America.

[Jack Gabb, Associate]

Just one quick follow-up from me. Are you looking at blending in third-party concentrate into your packing and leaching circuit? I guess there's no real constraint for you to produce more concentrate, so just wondering whether it makes sense or whether it's technically feasible to blend in a higher grade concentrate and whether you're looking at doing this?

[Amanda M. Lacaze, MD, CEO & Director]

Yes. Look, Jack, we've always heard of watching brief on other sources of Rare Earth. Generally speaking, we haven't done too many where -- yes, I mean, frankly, if we found something that we thought would be just absolutely fabulous, we can't buy if we found another orebody that we thought was better than putting more money into developing our own orebody. But part of the facility in Kalgoorlie is to ensure that we've got the flexibility to have alternate feedstock. And with various different parties, we do ongoing sort of metallurgical test work as far as that's concerned to understand. Would it be a case of blending it? Or would we campaign it, say, for example?

[Operator]

[Operator Instructions] We have no further questions on the line today. I would now like to hand the conference back to Amanda for closing remarks.

[Amanda M. Lacaze, MD, CEO & Director]

Okay. Thanks very much. And thank you all for joining, and I look forward to reading all of your various reports, which I assume will be glowing. Anyway, no doubt, we'll talk again soon. Thank you very much for your time.

[Operator]

Ladies and gentlemen, that does conclude our call for today. We thank you all for your participation. You may now disconnect.