Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by, and welcome to the Lynas Rare Earths' Quarterly Investor Briefing. [Operator Instructions] I'd now like to hand the conference over to Lynas Rare Earths. Please go ahead.

[Jennifer Parker]

Good morning, and welcome to the Lynas Rare Earths quarterly results briefing for the December quarter of 2020. Presenting the briefing today is Amanda Lacaze, CEO and Managing Director. And Amanda is joined by Gaudenz Sturzenegger CFO; Andrew Arnold, General Counsel and Company Secretary; Daniel Havas, Vice President of Strategy and Investor Relations; and Kam Leung, VP of Upstream. Please go ahead, Amanda.

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

Thanks, Jen. Well, good morning, everybody. And as always, thank you for your continued interest in the company. We -- I was a bit concerned with a minute to -- well, 11. I'm in Queensland. So then, we only had 2 people online, and I thought is everybody thinking, "Oh, it's also good that we don't have to ask any questions," and that's okay as well. But no, we now have a much more substantive audience. So I guess, for me, this is maybe one of the easiest quarterly readouts that I've done. I mean, really, wow, what a quarter. It was a very busy quarter. It was a very busy quarter and a very productive quarter. So it was productive in terms of our normal operations within the business. It was also a very productive quarter in terms of our progress on the significant growth projects that we have within our company. And it was a very busy quarter as we sought to continue to effectively manage some of the challenges that continue to be presented by -- to our business by the COVID-19 pandemic. So it's with a great deal of pleasure that I highlight the fact that it was the highest revenue recorded in this quarter that we have ever recorded in the history of the company. Of course, pricing, benchmark pricing was fairly kind to us. But I think that more importantly, it reflects the strength of the key end-use segments into which we sell, particularly new automotive. And by that, we're talking about hybrids, plug hybrids and electric vehicles. And I know that many investors are looking at Lynas as an excellent way to gain exposure to this electric vehicle and new energy thematic, of course, continued growth in renewables, particularly in wind power and electronics. Last quarter, a number of analysts said, "Oh, gee, you've done well to keep the cost where they are. Do you think you can manage to sustain that?" And you will recall that I said that when we targeted to be operating at 75% of Lynas NEXT capacity, we said we would expect to be able to capture cost efficiencies at that level. And we're pleased to be able to report this quarter that was a continuing strong focus on our costs that we have indeed been able to sustain those -- the efficient -- cost-efficient production. You, of course, will note that we have also kept our production running at 75% of Lynas NEXT rates as we'd previously indicated. And I know that some of you want to know, well, why don't we do more? And to that, I would say exactly the same as we did last quarter that there are still a great deal of uncertainties in the market. We learn new and different things about the effects of the pandemic each day, and the challenges are much more than just health. But health matters. And our large processing facility is in Malaysia, which is grappling with a third wave of COVID infections at present. There is a rigorous movement control order in place. And as always, we ensure that we comply at a minimum with that regulation. But always, as with everything in the business, we adopted the highest standards. And so where quarantine rules may be more stringent in Australia, say, compared to some other jurisdictions, we will always adopt the more stringent requirements. So in Malaysia, part of the movement control order is a request for all businesses to control and minimize the number of staff on site. We continue to have -- we've gone back to many of our administrative staff working from home. But at the 75% rate, we certainly are able to very effectively manage the requirements to safeguard the health of our employees and to meet the government requirements. And the other thing, I think, that is particularly relevant in the quarter just past is the progress that we have made on our growth project. So I said at the AGM that we are ambitious for our company, and we are operating in growth segments, and we are ambitious that our company will continue to grow as the market grows, that we will retain our share in the high-value segments and indeed grow, that we will meet and exceed the expectations of our key strategic customers. Meeting the growth means that we need to be increasing capacity at each stage within our -- each production stage within our operations. Part of that is the Kalgoorlie facility where progress is very satisfactory. One analyst that I read today wondered why we hadn't actually spent more money yet on Kalgoorlie. Of course, as always, we are carefully managing our procurement processes and profile to ensure best value. But we are moving forward with a number of packages associated with construction that have now either been -- we've selected suppliers or we are well advanced in the tender process. And I think that some of you would have seen the -- some of the pictures that we've got in the report of the kiln fabrication, which is continuing, notwithstanding some of the COVID-19 challenges. Of course, the other news which has been really significant in the last week was the grant from the U.S. government, the further grant of funding for the development of the commercial light rare earths facility in the U.S. This is very exciting. If we move to the next stage for the heavy development, we will end up with a facility in the U.S. with light, heavies and specialties. And this is very much in line with our overarching strategy to ensure that our upstream processing is close to our resource in Western Australia and our downstream processing close to our customers. And of course, the upstream processing means that we need to continue to explore and understand our ore body. And once again, we released during the quarter information related to that. So we will be releasing our half yearly results next month. And one of the limitations always of the quarterly report is that it provides a view of cash as opposed to a P&L view of profitability. Once we've released that, you'll be able to see how these 2 things into play. But we've got a history of really excellent cash conversion within the quarter, generally in excess of 80%, sometimes in excess of 90%. Simply the profile of sailings during this quarter meant that we had a lot of our deliveries late in the quarter. And I would reassure everyone who is listening in that those sales which were invoiced late in the quarter have now been collected. The cash has been collected in the early part of January. So really, very pleased with the quarter and, in fact, very pleased with the first 2 quarters of this financial year. So with those as introductory comments, I am, as always, happy to take any questions.

[Operator]

[Operator Instructions] The first question today comes from Daniel Morgan of UBS.

[Daniel Morgan, Director and Analyst]

First question. Just on the revenue side, it appeared that you made, again, more revenue or had a better price than I had thought. Obviously, there's a lot of moving parts behind that. Can you just help me unpack that? Is it -- did you sell more NdPr than you produced? Or is it better pricing on the SEG heavy product? Or did you sell more product towards the back end of the period and, therefore, you benefited from the price spike that occurred late in the quarter? Just trying to work out what's going on with your prices and why I'm under.

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

Yes to all of the above, Daniel. So yes, whilst we -- the later deliveries certainly meant that we did collect all of the cash within the quarter. As you're aware, we've been working with the rising price. And that's -- and whilst we would always prioritize customer needs over sort of speculating on what might happen to the price in any given week or day, certainly, one of the effects of those later deliveries has been that we have captured some higher prices. Yes, to the improved pricing from SEG. As you will have seen, the terbium price was almost -- well, it was $895. We've quoted this in this report. And I know that you've watched the publications carefully, and it touched $1,000 a kilo in January. So that certainly has that and the increases in disposing and pricing as well. But in fact, a number of the other elements in that, SEG have also appreciated a little in price, which is very pleasing for us. So -- and yes, if you have a look at the report, you'll see that in the period, we produced 1,367 tonnes of NdPr, and we did sell a little out of inventory, which had been carried over from the previous quarter in addition to that production.

[Daniel Morgan, Director and Analyst]

Okay. And I mean, I know you sort of addressed this a lot in your opening remarks, the -- why have you not changed the 75% capacity utilization. If I read your comments correctly, it's mostly about the safety of your staff and being a good citizen in Malaysia rather than a statement on demand. I mean, if you look at the demand side, you do state in your report that demand seems to be more resilient than perhaps everyone expected for rare earth, and it's quite clear that the pricing is very strong. So I'm just trying to clarify that this is more just a local Malaysia thing rather than a call on demand being weaker than what we might have thought it would be.

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

Yes. Maybe I could expand on it a little. Most certainly, there is a risk management portion to our decision. And that entails more than -- the #1 piece there is about health, right, and ensuring that we comply with all regulations and always take the most conservative approach to managing the health of our people. But a second thing, which I did highlight in the report, is the effect of changes in commercial shipping. So part of that is about customer deliveries, but another part is about getting concentrate from Mt Weld to Malaysia which, generally speaking, for many years now has been a relatively noncontroversial part of what we do. But at one stage during the quarter, we had every single shipment that had gone -- had departed Mt Weld for Malaysia was delayed, every single one. And so if we had to bring -- in that instance, if we had been running at higher rates, we would have been compelled to actually stop production because of those delays in shipping. So we're juggling quite a lot of balls here. And so the more cautious approach to production planning, I think, has served us quite well. I also indicated last time around that we had some major maintenance being conducted on at least one of our kilns. And certainly, that has -- whilst we can often sort of run hard, coming up to a maintenance shut and then fill our buffers, some of these other complexities have made that a little bit more difficult. So -- and in terms of meeting market demand, certainly, if we were looking at this and saying at 75%, we couldn't sustain supply to our strategic customers, then we would be revisiting that. And we see that, that has not been an effect so far. We've had to manage quite carefully as we've allocated stock. But certainly, we would be hoping that within the next couple of quarters, we'll be turning that production up again. But as I said, there are a number of moving parts, and really our production planning at 75% is to do with sort of careful risk management.

[Daniel Morgan, Director and Analyst]

And maybe just last question on the markets. I mean the price for your commodities have clearly lifted substantially over the past quarter. Just wondering if we could get your high-level take on what is going on in the market. Is this fundamentally back to that -- is there more demand for these products? Or is it maybe the supply anxiety piece that's coming through and the concern about supply from China specifically?

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

I think it's a little bit of both. We've highlighted the fact that in the segments that we operate -- so when we think about automotive, the sale of new energy vehicles has continued to pace. And I'm alert to the fact that even here in Australia, as I was driving last evening and I was listening to an article, which was talking about the strong demand for automotive, and I guess that all of us who are no longer able to travel overseas, and much has been written about people sort of giving themselves a treat. And it appears that new cars is one of the areas where people are wanting to give themselves a bit of a treat. So certainly, we're seeing that demand is sufficient to be creating a bit of a balance in the market, sort of giving a bit of foundation to the pricing.I think that we will never give a forecast on pricing because the only thing that we know for a fact is that we will be wrong. But the dynamics of the market appear to be relatively balanced at present. But we're waiting to see what happens after Chinese New Year because, as you know, there's -- or Lunar New Year because it's -- Chinese industry typically shuts down during that period. So we'll see what happens after then. I think that the fact that the market is not flooded with product is probably consistent with keeping this sort of nice balance which is underpinning these improved prices.

[Operator]

Your next question comes from Jack Gabb at Bank of America.

[Jack Gabb, Associate]

Just 2 quick ones for me. Firstly, just to go back to the capacity question. Have you applied, I guess, for a permanent uplift from the Malaysian government or the one with DOE and the atomic agency with respect to concentrate imports just to get above the -- or get to the sort of closer to nameplate capacity? And then just secondly, on the relocation of cracking and leaching, can you just let us know what's outstanding in terms of permitting?

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

Okay. So in terms of the operations in Malaysia, we had disclosed previously that we've had -- we actually have approval to -- for a higher level of import. What we don't have is the approval on the higher level of processing. And of course, in the FY '20 calendar year, we didn't test that limit. And so we continue to engage with the DOE on a variety of matters including this issue of processing volumes. But I don't have any new news on that. And in terms of the cracking and leaching, permitting in WA, yes, we don't propose to have a running commentary on that. I think that we've disclosed already that it does not trigger an action under the EPBC. So therefore, it will be regulated under the Western Australian state law that we are working closely with the EPA on that and that, at present, none of those approvals are on a critical path at this time. So all is working according to -- our team is working very closely with the WA government because we have lead agency status with FTSE and also working very closely with the EPA to move through those approvals appropriately. We also disclosed not long ago that on the first step, we've come back with a number of questions, and we're just answering those in good order.

[Operator]

Your next question comes from Reg Spencer of Canaccord.

[Reg Spencer, Mining Analyst]

Congratulations on a very good quarter. A lot of my questions have been answered already. I was just hoping you could help me understand a little bit better the longer-term capacity plans, noting now that you're looking to establish a light separation facility in the U.S. I know we sort of had a brief discussion on this in the past. But maybe what I was hoping was to get a bit of a better idea about capacity plans with the U.S. included? And what I meant by that is, is that going to be incremental to what you're doing in Malaysia, noting that you've always stated in the past that you would ramp up production in line with the market. But I was curious about what -- how that might differ from actual in-store capacity. So any comments you've got there, Amanda, would be much appreciated.

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

Sure. So I still think 2025 is a fair way away. And so we've always been loathe to then also be talking sort of to the [indiscernible]. So particularly in a market which is a high-growth market such as the markets into which -- the markets into which we sell. We aim to grow with the market. I mean, if we think back even 3 years ago, we did sort of some analysis when we looked at sort of the consensus amongst industry observers, and it basically said we'd need a new line and, say, every 4 or 5 years in terms of capacity. So we seek to certainly fill that, and we're seeing the Malaysian plant will continue to grow because our key customers in the East Asian markets, particularly Japan and in China as well, are growing and growing substantially. So we will be aiming there's a way that we configure our new industrial footprint. Yes, we will be aiming to ensure that it is additive, not replacement. I mean that's how we create value. But the exact path to doing that requires us to be able to reliably increase throughput at each of the production stages. And so as we continue with our growth project, that's exactly what we're aiming to do. So I'm not ready to say to you, this is the number or that is the number. What I am prepared to say to you is that, if your question was, is this as good as it gets, 10,500 tonnes a year of NdPr, my answer would be no, that's not as good as it gets.

[Reg Spencer, Mining Analyst]

That's a good answer. One more question, Amanda. Given where pricing is for the more valuable rare earth products at the moment, we are sort of approaching incentive price levels for greenfield developments, we all know that these projects take a long time to come online. But your points earlier about your own capacity expansions, in order to deliver that supply when the demand is there or when the demand appears, those investments need to be made sooner rather than later. Does that mean that there is the risk of new market entrants coming now that we have in that incentive pricing in the market? And does that mean that you would look to potentially accelerate where possible any capacity expansions?

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

We really only have one speed, and that's as fast as we can go. So we are very focused on doing these things so that we are prepared. And I think I've talked to you before about a lot of the problems in mining and in chemical industry is that they bring on capacity in big chunks, and it's always at the wrong time. It's either before the demand or after the demand. Our modular approach means that, hopefully, we will have a situation where we can cost effectively incrementally increase as the market does because the market doesn't seem really go in leaps and bounds. In terms of other supply coming online, I tend to spend less of my time thinking about that than others do and remain very firmly of the view that the textbooks are right and that competitive markets are good for everyone. The more activity, the more innovation, the more demand is likely to increase. And for us, as the market leader, outside of China, our job is to make sure that we stay ahead of the game. So it's good for us as well. It keeps us on our level. And we had no intentions of giving up those things that drive competitive advantage for our business.

[Reg Spencer, Mining Analyst]

Congratulations to you and the team, another good quarter.

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

Thanks, Reg.

[Operator]

Your next question comes from Dylan Kelly of Ord Minnett.

[Dylan Kelly, Senior Research Analyst]

A couple of questions for me, just on the U.S. business. I just want to go into some detail if we can. When are you going to be -- firstly, when are you going to be in a position to announce, say, the details behind the various parts of that U.S. business now? Or could you give us an understanding of what's preventing you from telling us about some of the moving parts there? I'm referring to things like what's the joint venture structure in terms of percentage share, what are the rough economics in terms of total CapEx, what's the impact on operating costs likely to be, elements such as that. I'll pause there and we can discuss the second one after.

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

Okay. When we provided the brief on the heavies, we identified that we had agreed certain milestones in the Phase 1 contract with the U.S. government. And upon satisfaction of those, we may be granted Phase 2 contract, although there is no guarantee. But clearly, that has a decision feeds critically into the overall configuration of that facility. With respect to the sort of detail of what you're talking about, I don't think I've ever told you precisely what CapEx and operating costs are line by line, so I'm not expecting that we'll probably be doing that. But we've indicated that by the end of this financial year, we have an expectation that we will know the path forward on the heavies. And so I think you could safely assume that we would be targeting that, by the end of this financial year, we will have a very fleshed-out plan for that facility and exactly how all of those things that you've identified look. So achieving the agreement with the U.S. government on the light certainly adds to our vision for that facility. And we do have quite a lot more work that needs to be done there because that's come as a result of an initial tender response, but now we need to sort of really put our shoulders to the wheel on quite a lot of the additional engineering and design. But give us a little bit of time, now that we've got that one under our belt. And hopefully, soon, we'll have more clarity relating to any second phase funding on the heavies, and then we'll be able to give you that more comprehensively too, Dylan.

[Dylan Kelly, Senior Research Analyst]

Now in terms of just some of the finer detail on the tender announcement, the 1,250 tonnes out of 5,000 TREO, that's about, what, 25% split in terms of production. That's a bit lower than -- or quite a bit lower than the 35% that you've been running at in recent history. Is that representative of what the DoD is required and that's completely different to, say, what the business as a whole is going to be running at? Or is that more of a reflection of, say, what the introduction of more Duncan ore is going to do to that overall production split?

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

Yes, that's a relatively theoretical number, and we will certainly fine-tune that. And sort of the production even in our facility at present bounces around what percentage of daily production is NdPr versus any other material. But certainly, as we're moving forward, inclusion of additional heavies within our overall feed will necessarily affect the proportions of the other materials.

[Dylan Kelly, Senior Research Analyst]

Okay. Fair enough. And just one final thing on the curious mention of the word guidance, I don't think I've seen that where -- or you used that term before. You're using at the context of saying a plant utilization at 75%. Does this mean you're moving more towards some tangible harder targets in the future that we should be thinking about, maybe CapEx? I'd like just putting my hand up there. Rest of the year, utilization rates -- come on.

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

No, no, no. You're applying far too much thought to sort of this is [indiscernible]. I think we did guide to the market of the fact that we were going to run the plant at 75% of our Lynas NEXT capacity, and that's all that, that word really indicates.

[Operator]

[Operator Instructions] Your next question comes from Anthony Kavanagh of Chester Asset Management.

[Anthony Kavanagh]

Well done again on a great quarter. I guess a couple have been asked -- or maybe in the past on the capacity question, but I was curious, Amanda, on the widening spread between neodymium and praseodymium. I'm just curious as to how much of that spread you can actually capture. But I know in the past, you've spoken about separating the 2 elements. But I mean, can we think about close to 100% of the separation capturing the high neodymium price?

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

No. So it is the driver -- now our decisions on how much we separate are based almost purely on customer demand. And within our particular customer set, how much of the material they're looking for is pure Nd versus PrNd. So I think the interesting thing on that, and it's one of the things that I often say, we are Lynas Rare Earths Limited, not Lynas NdPr Limited. And as I look sometimes at the way that people think about the rare earths market and about maybe some of the other sort of business propositions is very, very NdPr-focused. And clearly, that's the key value driver today. But all of these elements have applications and uses, and the prices change around over time. 15 years ago, Cerium was King and Nd was a byproduct. 3 years ago, when we were first looking at the separation of Nd and Pr, Nd was sitting at the same price as PrNd and PR was being sold at a premium. So these things sort of move around according to demand, and our production will move according to demand to ensure that we meet the needs of our customers and their specific application. So some of them use more rather than less. Some of our customers don't use any separated Nd at all and then magnets and others, use it in a number of applications. So that really is what's driving us is our customer requirements, always, of course, with a watchful eye on what's going on with price. But as you would recognize, Anthony, more Nd means more separated Pr as well. And so we need to have a good, strong marketing program for that separated Pr as well because we don't want to be producing lots of Nd and building lots of inventory in Pr.

[Anthony Kavanagh]

But just to clarify, if you have the demand for it, do you have the ability to separate and sell Nd and Pr 100% separately? Is there capacity for it?

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

No. Well, a, we don't believe that there would ever be the demand for that. And b, no, we don't. We configured -- we had 4 [ FX bar ] trains, which separate the PrNd from the La Ce, and we modified one of those trains to do the Pr Nd separation. And at this stage, we're not intending to change any more of that production capacity.

[Operator]

[Operator Instructions] Your next question comes from Matthew Chen of Foster Stockbroking.

[Matthew Chen, Equities Research Analyst]

I just wanted to ask on the U.S. Light Rare Earth separation facility, just a follow-up question on that. So is there a kind of thinking in terms of the DoD perhaps the analogy is JARE as to LAMP output as is DoD to that proposed light rare earth and heavier earth output? Is that a fair assumption to make?

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

Yes. Matt, I probably would look at it slightly differently in terms of what's similar between these approaches. And I think the primary task of JOGMEC and JARE is to ensure supply of raw materials in the Japanese industry in a way that means that Japanese industry can grow and flourish. And so JOGMEC is the Japanese government arm for doing that. In the U.S., the U.S. has quite a long history of using its defense industry and defense industrial base to create capable and commercial supply chains into which industry can then step. I mean you think about the history and the famous examples like parachutes becoming stockings and all of those sorts of things. So the -- you will note in the wording that the Light Rare Earth plant funding is for a commercial facility, so it's not for a captive facility simply for supplying Department of Defense needs. This is about being a first step in the establishment of -- or the reestablishment, the reinvigoration of rare earth supply chains in the U.S. So we've got sort of a first agreement. But clearly, there will be -- there's a lot more that we need to do in terms of development and interaction, but we see the primary intent here being sort of reinvigorating this important industry.

[Matthew Chen, Equities Research Analyst]

Great. And I mean, it's sort of much has been written about the requirements for the U.S. industry, in particular, for the heavy side. I mean does that kind of downplay the demand for the light? Or is that kind of go arm in arm because the solvent extraction process spits them all out depending on your orebody?

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

So I think that really, the initial focus on heavies has to do more with the fact that there is no non-Chinese source of separated heavies today, right, whereas Lynas today can satisfy outflow China demand for NdPr, right? So there is a guaranteed supply to us. It might not be where the U.S. government would like it to be because clearly, they would like it to be supporting sort of U.S. industry, but there is a supply to us. So I think that the initial focus on heavies is simply a recognition of the fact that there is a gap in the supply chain there.

[Matthew Chen, Equities Research Analyst]

Great. All right. And just to clarify, what was the -- that 5,000 tonne total rare earth, is that inclusive of the heavies and the specialties as well? Or is that purely...

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

No, they're just light.

[Matthew Chen, Equities Research Analyst]

Lights and -- okay. And so can you remind me what the potential capacity for the heavies production side is?

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

So we haven't actually disclosed that but just sort of heavy rare earth facilities in China typically operated about 3,000 tonnes a year.

[Matthew Chen, Equities Research Analyst]

Okay. So I guess my follow-up question was going to be, is it proportionate to the distribution running at that sort of 5,000 total REO for the lights? Is that a way to think about it? Or is that -- is it -- will it be separate? Sorry, just deeper...

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

We need to do some more work on that. We're relatively fresh out of blocks with this sort of definitive step on the lights. And so we need to do some work on that. But we will clearly disclose that once we've done the work and have the numbers appropriate.

[Matthew Chen, Equities Research Analyst]

And it sounds like there's an update at the end of this fiscal year. That's the common...

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

There -- yes, yes. That would be our objective, yes.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back to Ms. Lacaze for closing remarks.

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

Okay. Thank you. Thank you, everybody. It's much appreciated. And I -- my fervent desire is that all quarterly reports will be as positive as today's is. Okay. Talk to you all again soon. Bye.

[Operator]

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