Lynas Rare Earths Ltd
ASX:LYC

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Lynas Rare Earths Ltd
ASX:LYC
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Price: 7.85 AUD -1.13% Market Closed
Market Cap: 7.3B AUD
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Earnings Call Transcript

Earnings Call Transcript
2022-Q1

from 0
Operator

Thank you all for standing by, and welcome to the Lynas Quarterly Results. [Operator Instructions] Please be advised that this call is being recorded today. And I'd now like to hand the conference over to Lynas Rare Earths. Thank you. Please go ahead.

J
Jennifer Parker
Vice President of Corporate Affairs

Good morning, and welcome to the Lynas Rare Earths Investor Briefing for the September Quarter of FY 2022. Today's briefing will be presented by CEO and Managing Director, Amanda Lacaze. And joining Amanda today are Gaudenz Sturzenegger, CFO; Daniel Havas, VP of Strategy and Investor Relations; and Sarah Leonard, General Counsel and Company Secretary. I'll now hand over to Amanda. Please go ahead, Amanda.

A
Amanda M. Lacaze
MD, CEO & Director

Thanks, Jen. Good morning, everybody and a special hello to anyone who's joining from Melbourne. And I hope -- yes, maybe you aren't joining today because you're too keen to be out and about and making the most of the end of your terribly prolonged lockdown. Anyway, thanks for joining today. Pleased to be able to present the quarterly results.We've delivered our second highest revenue quarter on record, and that's reflecting very strong demand and high prices. And I guess one of the things that's really got us pretty enthusiastic is that our customers are very optimistic about future continuing demand growth and we continue to see a lot of strength in the price.As we think about, however, some of the challenges that we dealt with through the quarter, it was definitely the most difficult of the pandemic. In Malaysia, the third wave of the pandemic was almost completely contained within the quarter. We started at about 5,000 cases a day in Malaysia, we peaked with an extended period of around about 20,000 up to 22,000 cases a day. And then by the end of the quarter, we've dropped back down to about 5,000 cases a day. And of course, that reflected significantly increasing vaccination rates in Malaysia, including, of course, within our own workforce.But during the period of time, and it was several weeks where we were looking at the sort of 20,000, plus or minus, cases every day, it created a -- really an everyday pressure for our people. And it did mean that there was a lot of infection in the community. Some of our staff were exposed to it. We run our own very careful track and trace program. And so in some instances, we had staff having to isolate because they had close contact either with their colleagues or family.I'm really pleased to say that all of our staff who did suffer from COVID have recovered. But as we've noted in the report, where we did have staff isolating, it tended to be -- to take our whole crews, who had been in contact with each other. And so whilst we redeployed staff across the site, wherever possible, there is a limit to the number that you can redeploy. Say, for example, it's hard to take a technician and put them into our lab doing some of the highly skilled work required there.Of course, there's a lot written about some of the effects of the pandemic, particularly on shipping, exacerbated in Australia by some of the continuing set of issues on the waterfront with sort of industrial unrest. But for us, the biggest issue relates to the ability to get containers and, by extension, ships as well.We were pretty excited at one stage, we got up to about 35 days concentrate cover on site, and we thought this was all over, red rover, but now we're sort of seeing further tightening in shipping, which is presenting a few challenges for our logistics manager. Notwithstanding all of the above, as the pandemic effects receded in September, we're very pleased with our production outcomes in Malaysia, and we're seeing that continue into October.In Australia, we will absolutely do our part in complying with the Western Australian Government's vaccination mandate. As most people would be aware, the Western Australian Government has now issued orders for mandatory vaccination for all fly-in, fly-out workers. We support this certainly philosophically in terms of managing a safe workplace for our people and the fact that we are operating in a remote location and certainly would not want to, in any way, introduce any illness into that -- into the local population. So we're very happy to comply with the Western Australian mandate. And hopefully, that will mean that travel in and out of Western Australia will start to happen again early in the new year.Providing a couple of other updates in the report on Kalgoorlie. It's very exciting that we've now had the EPA recommend the project for approval. Of course, there are still some final steps around this, including receiving the ministerial statement. But as I said, it's great to pass through that gate. We've shared some photos in the report. The aerial photo sort of showing the work, which has already started on site in compliance with the miner and preliminary works approval. The -- you can see our giant kiln. It's well and truly on its way to Australia on a specially chartered ship. And we believe that we will be in good shape to receive that when it lands. I can't wait to see it in person. I'm at present sitting out a couple of weeks in Adelaide, ahead of being able to get into WA shortly for an extended stay.Quite interestingly, many of you -- previously, many of the analysts have asked why we're not spending more at Kalgoorlie, and we're very confident with the rate at which we have led our tenders. We have placed all of our orders for long lead time items. So some of the concerns about sort of cost overruns in that area, we've got a great deal of confidence because they have -- those orders have been placed on agreed contracts and pricing. And we've got over 70% of our total equipment requirements have been tendered and contracted.So for those of you who were a bit worried about not spending more, you will see that we do actually have a higher CapEx spend this quarter than we've had previously, and we expect that to continue to accelerate as we continue to accelerate works on site.We've also made good progress on approvals for the now preferred site in the Gebeng Industrial Estate in Malaysia for the PDF, and have -- so the EIA there has been lodged and is out the public comment at present. So all in all, a lot of progress in a time when I think all of us are just wishing that we no longer ever had to say the word "COVID" and certainly not with respect to business performance. But we're seeing our way through this. The vaccinations of our workforce give us a lot of comfort and confidence in our first objective, which is to ensure their safety and health but -- as well as that to ensure the continuation and indeed, acceleration of the business as we meet the market.We, at Lynas, did our heavy lifting over the past few years in terms of standing up our facilities, sort of optimizing operation of those facilities, really becoming experts in processing our material. At the time, we aimed to ensure that we were ready to bank the benefits of market growth as it came as we moved into what we have always known would be a rapid growth phase in the market. We are now seeing that inflection in growth in the market. We think that it's going to be particularly exciting over the next 3 to 4 years, and we're ready to take advantage of that growth.And with that, I'd be happy to take any questions that people might have.

Operator

[Operator Instructions] Our first question comes from Daniel Morgan at Barrenjoey.

D
Daniel Morgan
Analyst

First question -- well, congratulations on the EPA recommendation. That's a huge step forward. Just wondering if you could comment on the capital cost estimate of $500 million, which was given a while ago now. And what, obviously, everyone can see on the market is a very tight market in WA for employees and contractors. I'm just wondering in light of that, what can you say about that budget of $500 million?

A
Amanda M. Lacaze
MD, CEO & Director

Daniel, welcome back. I guess the roses are looking good after all that time in the garden?

D
Daniel Morgan
Analyst

Yes, they are. I'm back [ there ].

A
Amanda M. Lacaze
MD, CEO & Director

So yes, I'm aware that there is a lot of speculation about whether we will do as we have done previously, which is to bring projects in on time and on budget. At this time, we -- and one of the reasons why I sort of stressed the fact that we've got our -- sort of all of our long lead time items ordered 70% of our total equipment. We've showed the photo of the site, so you can see we are starting to make progress. We have nothing to add to the guidance that we've already given that we expect to bring this project in on time and on budget.

D
Daniel Morgan
Analyst

So on the staffing, the people that are going to need to erect all the equipment that's going to arrive, and the contractors, I presume that they're involved, have you -- what can you say about organizing, mobilizing them in light of approvals being imminently granted?

A
Amanda M. Lacaze
MD, CEO & Director

Yes. So we've talked a little bit about this previously and the fact that we are managing this project in-house. And so we've got -- we've packaged the work into specific packages. So for example, we've contracted a particular supplier to do the kiln fabrication. It comes in 5 parts. It needs to be welded and lifted into place -- or lifted into place and welded is probably better order to put that. And so because we're managing this and we're able to construct those packages in a way, we talked about this previously, that allows us to engage local and -- local businesses. And oftentimes, they will tend to have more stable workforces. And for example, if we're operating in sort of a contractor space where people are competing for the same workforce. So we are engaged with the city of Kalgoorlie on things like accommodation options for sort of peak workforce periods in the construction phase for the project. But we are also working very hard, and this has always been part of the reason why we're at Kalgoorlie is that we want to be part of the community, and we want to be driving economic benefit into the community. So where possible, we're using local suppliers.

D
Daniel Morgan
Analyst

And how much -- I can obviously see how much cash you've spent on CapEx through your cash flow statements. But how much has been spent on Kalgoorlie, that project so far?

A
Amanda M. Lacaze
MD, CEO & Director

Well, we haven't disclosed that. But we have disclosed that we've placed orders for 70% of our long lead time -- of our total equipment, and 100% of our long lead time equipment. So that gives you a bit of a headline on that. And for us, as we look at this, we think about it. And if we think about things like S curves on things like earned value, we're probably 30% to 40% of the way there or even though -- of course, we manage our cash. We don't see any reason why we should be sort of spending money faster so people think that we're moving through things fast. We are moving through things at a pace, and we're getting sort of very good development. And once again, it's one of the reasons why we've shown the photo. So I understand that everyone -- I understand there's a lot of speculation about this and whether we can do this. I'm not quite sure why there's so much speculation. We have a track record of delivering our projects on time and on budget. And we're providing sort of briefing on really the progress that we are making here. And we have reaffirmed the fact that we expect to do this on time and on budget as we've done all of the other projects.And we would tell you if there's something that changes that. But I mean, all of these things, you just have to do things as you do them, and we are doing these things as we do them, and we're letting the market know that we're doing it. I mean I remember someone speculating that there was no way we could possibly get a kiln produced in the middle of a pandemic. And guess what? It's on its way. So I think we have some track record here.

D
Daniel Morgan
Analyst

I appreciate all that. And I think the questioning is just extending from industry trends that we're seeing, not necessarily your handling of them. It's a very tough environment in WA, I think. Just maybe switching tack, just on the operating rates. Now you had a tough quarter on that with COVID and logistics, et cetera. It seems like that is -- was improving towards the end of the quarter. You said that improved into October. Just wondering if you can run harder than the 75% through the end of the year. Or is logistics still a problem?

A
Amanda M. Lacaze
MD, CEO & Director

The plant can do it, and our big challenge will be in a couple of specific areas related to logistics, and we're all over it. I got to tell you, we're looking at alternate strategies to be able to manage this. But yes, Malaysia is -- we certainly -- the Malaysian Government has moved to living with COVID, i.e., treating it as an endemic disease rather than a pandemic. That gives us more confidence about the way that we're going to be able to manage our operations there. But certainly, we probably had more challenges on shipments from Australia to Malaysia than virtually any other area. So we're working on alternate strategies to mitigate some of those risks. We're keen -- we're as keen as anybody to dial up those production rates and confident that we can do it. So long as we get all of the sort of feed and all of the inputs, which is probably -- which, as I said, is one of our major challenges, just getting a lot of those inputs on site at the right time.

D
Daniel Morgan
Analyst

Yes. Sure. And just last question, somewhat related to that is, it would appear that -- I mean, you haven't, to date, been running at full capacity or what your licensing would allow you to do, which is a calendar year license. I'm just wondering if any unused portion of that, that you wouldn't use this year, does that carry over? Or is that lost at the end of this year? Is that potential loss at the end of the year?

A
Amanda M. Lacaze
MD, CEO & Director

We have a conversation with the regulators on that. We had a conversation with the regulators on that last year. And because it was an unusual year due to the pandemic and we agreed that we could carry over some of that. And we will have a further conversation with the regulators this year. But ultimately, it's within their decision. But given that the regulation primarily relates to quantities of residues produced, then we believe we can have a productive discussion with them.

Operator

Our next question comes from David Deckelbaum from Cowen.

D
David Adam Deckelbaum
Managing Director and Senior Analys

So I'm curious on -- last caller asked the same question about run rates now. I think you had alluded to in September that operating conditions have improved significantly. I guess I'm also curious, it appears that some of the production issues, one would be just related to staffing and COVID-related shutdowns, but also the difficulty in obtaining perhaps some of the chemicals associated with cracking and leaching and some of the logistics surrounding some of the processing inputs. Has that situation abated at all just given some of the ongoing global shipping [ lows ]? I guess we're just trying to get the sense of -- it's one thing to have better uptime at the plant, but is there still kind of a constraint around necessary inputs to your process?

A
Amanda M. Lacaze
MD, CEO & Director

Thanks for the question, David. Where we've been able to, we've mitigated this by building additional inventory. And so we are carrying more inventory and for those who sort of just track cash costs as opposed to when we put out a half yearly. And yearly, we provide a truer cost picture. We'll see that sort of cash costs have picked up a bit. And one of the reasons why is because we've increased onshore inventory for a number of the inputs, and that's a way for us to mitigate some of that logistics risk. The -- but there certainly continue to be challenges, and we have to manage it very closely. And at this stage where we're cautiously optimistic that we've put sufficient mitigations in place that this shouldn't handicap it. But much as we want to click our heels 3 times and say the pandemic is over, unfortunately, its effects are lingering.

D
David Adam Deckelbaum
Managing Director and Senior Analys

Sure. Indeed. Understood. And then maybe just pivoting a bit, you talked about Kalgoorlie at length and then just talking a bit about some of the other 2025 projects, United States, some of the expansion there. Can you talk a bit about just the merit evaluation and maybe just some expectations around how that process is going and what sort of milestones we might look towards for the rest of the year or perhaps into '22?

A
Amanda M. Lacaze
MD, CEO & Director

Sure, I can. I probably can't tell -- give you much satisfaction. I would start by saying, I am pleased that I don't work in government because time lines are, it seems, sort of infinitely flexible. And so as we look at this, I said, we met our milestones for submission and material. We've provided further material. I think that the -- we know that the merit review is ongoing. And so there's -- we expect that some of that will be tied up with the U.S. budget determinations and time lines. So unfortunately, at this time, I can't give you sort of milestone for when decisions might be made other than to say that we're now increasingly just sort of confident of our ability to mobilize pretty quickly once the decision is made.

D
David Adam Deckelbaum
Managing Director and Senior Analys

Understood. I appreciate the answers, Amanda.

A
Amanda M. Lacaze
MD, CEO & Director

Okay. Thanks, David. I'm sorry, I can't give you something more definitive on the U.S. We've been enthusiastic to be able to do that, but we'll just respectfully await sort of the determination from the group -- from the government.

Operator

[Operator Instructions] Our next question comes from [ Tom Shumatsu ].

U
Unknown Analyst

I've got 2 questions. The first one's in regards to 100% of NEXT production -- at 100% of NEXT production rate, would -- are we still in compliance with the regulatory caps that we have in Malaysia in terms of how much Lynas can produce?

A
Amanda M. Lacaze
MD, CEO & Director

Tom, no, we've talked about that once previously that if we were at 100% of NEXT, we were seeking an uplift in the processing license. There are 2 separate licenses associated with our operations. One is the license to import lanthanide concentrate. That's grounded by [ lost minister -- or ministry, but we'll actually go the AELB ]. And the other one is a processing approval, which is granted by the DoE. And we've not tested those levels over the last couple of years because of the effects of COVID.And so from the end of next year, we'll start to be getting a little of the rare earth carbonate that will be coming through from Kalgoorlie. So we actually don't see this as a constraining factor on the business at this time.

U
Unknown Analyst

Okay. Okay. And I noticed that -- I haven't had the opportunity to go through the entire EPA that was approved -- recommended for approval in [ the BA ]. But I think there was a mention of -- one of the conditions is that the waste is now sent back to Mt Weld. Am I right? And if yes...

A
Amanda M. Lacaze
MD, CEO & Director

Tom, can I just check? Where are you from?

U
Unknown Analyst

Tokyo.

A
Amanda M. Lacaze
MD, CEO & Director

Right. Okay. From which firm?

U
Unknown Analyst

Bluebird.

A
Amanda M. Lacaze
MD, CEO & Director

Okay.

U
Unknown Analyst

Bluebird. Yes, Bluebird Capital.

A
Amanda M. Lacaze
MD, CEO & Director

Okay. Thank you.

U
Unknown Analyst

Yes. No problem. Yes. So in regards to the waste from the processing side in Kalgoorlie is going to be sent back to Mt Weld, am I right? And if yes, what would be the impact on your expected cash cost? Is it going to move it up or move it down or this is going to be neutral?

A
Amanda M. Lacaze
MD, CEO & Director

So there are a variety of different effects from -- being in -- operating in Australia. There are some costs which go up and there are some costs which go down. The proposal as it stands that we submitted to the EPA for consideration in which they have recommended for approval includes backloading material to Mt Weld. And of course, we're loading materials down from Mt Weld. And so we have a backload opportunity there, which is -- which will, I think, work well for all involved in the process.

Operator

We have no further questions. So Amanda, I'll hand back to you for closing comments.

A
Amanda M. Lacaze
MD, CEO & Director

Okay. Terrific. Thank you, everybody, for joining. And if there is anything -- any further discussions that people would like or sort of more background, please don't hesitate to contact us directly and Daniel, who's looking after our Strategy and Investor Relations, and we'll be pleased to speak with you. Thank you all.

Operator

Thank you so much. This does conclude today's conference call. Thank you all for joining. You may now disconnect.