Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Transcript 2018-Q3

[Unknown Executive]

Good morning, and welcome to Lynas Corporation's conference call for the quarter ending 31 March, 2018. I'll shortly hand over to Amanda Lacaze, CEO and Managing Director of Lynas Corporation, to present the results. Following the presentation, Amanda will be available for questions along with Andrew Arnold, General Counsel and Company Secretary.

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

Okay, sorry. So good morning, everybody. Thank you, once again, for joining us all. I've got my suppliers here but in Kuantan today, our forecast is it's going to be hot. So I'm sure most of you will have already read the report and what we're seeing is the March quarter for us was relatively uneventful in terms of our results. However, it was very eventful for us in terms of our investment for the future.So just summarizing the results outcome. As we indicated at our -- when we put out our last quarterly, and I think our half yearly, NdPr production was up on last quarter as expected. That reflected some pretty careful management, particularly a changed approach to managing for the regulatory inspections that were due on our second 2 kilns. The first 2 were done last quarter.It also reflected having to cope with a few sort of unplanned effects, including in late January, there was a week where water supply across the whole of Kuantan and including into the industrial complex, was significantly affected by a failure in the water catchment zone. So volume was up a little, about 100 tonnes. So that was as indicated. The price was pretty stable. You will recall that in the last -- in the December quarter, where we got a lot of the benefit from the -- I think someone called it the other day a micro bubble in the prior quarter. And then it dived right down during December. It came back to really where it had been on -- if you looked at a longer-term trend starting from about December 2016 and has been just nicely moving up a little month-on-month. So we had in our results, of course, a little bit of a hangover from that very low price which was in December because some of our prices are pegged to either end of prior quarter or end of last month.As indicated in our report, demand was strong, so strong that we were unable to meet -- in fact, for about the last 6 months -- have been unable to meet all of the orders which been placed. I was in China a couple of weeks ago, and I have to say that inquiry for engaging in business with Lynas is very strong. And certainly, demand remains stronger than our current production, which gives us a great deal of confidence in having selected Lynas NEXT as the best strategy for growth at this time. And finally, it was pleasing to see during the quarter further improvement in the balance sheet as we've had further conversion of bonds, which now are sitting at plus or minus $15 million in addition to our $170 million senior debt.So the results were relatively uneventful, but it was a very eventful quarter in terms of investments in the future. And of course, this showed through in our cash flow. And we're very pleased to be able to fund our investments out of cash flow and to be able to fund the Lynas NEXT at least of -- which will take us to about 140% of design, and from cash flow bodes very well for the future of our company. So during the quarter, our teams were very busy. Those at Mount Weld and also here in Kuantan. At Mount Weld, key works were completed in terms of de-bottlenecking the mill. Some additional capacity in our flotation circuit is under trial at present to optimize the way that we should best implement that and a number of activities which are aimed to improve our usage of water and our water balance. Here at the LAMP, during last quarter, we had significant investment in our cracking and leaching area, including heat exchange process in MgO neutralization circuit investment in our waste gas facilities. And as in the market, we had a number of very intensive negotiations with customers as we look for further improvements in our pricing resilience. For the quarter that we're in currently, an even more intensive quarter in terms of the project NEXT build. Walking around the plant here at present is a reminder that we're trying to do something quite clever in terms of running the plant whilst undertaking some pretty major works in a number of areas. This quarter or this month in particular, we have a huge amount of work going on in the cracking and leaching area, including the replacement of the concentrate feed belt, including further major changes for our MgO facility, which really is at the heart of improving our recovery. We've also just -- [ actually ], I am expecting today is going to be about the first day that we get on-spec material out of our new lanthanum and cerium separation circuit. And similarly, we've got a number of new investments going in and product finishing, particularly in the wet treatment area.So we have a very busy quarter this quarter, which is reflected in the outlook. When we look at expenditure this quarter, it's swinging away from the mining activity to much more significantly associated with the NEXT program. So this quarter, we've prepared ourselves well for this. We finished the quarter with some substantial stocks in our buffer tanks between upstream and downstream solvent extraction to ensure that we're able to continue with as little disruption as possible for our finished materials as we are doing this substantial work upstream in the plant. So the market remains fairly controlled in terms of the pricing. It's not fluctuating wildly, which we think is actually a very good thing for continuing to underpin growth of demand. And as I said, demand for us remains very, very strong. So with those few words, I'm happy to take some questions.

[Operator]

We've got a couple of questions there. The first question comes from the line of Dylan Kelly from CLSA.

[Dylan Kelly, Research Analyst]

Amanda, 2 questions from me. Just firstly, on the 5B, you've got the forecast for the last quarter for this year. Development costs, you've got going up to about $48 million up from about $42 million this quarter. Could you just give us some background for that increase and what's going on there? The second question I've got is just around the Malaysian elections, which got called last weekend, due in a few weeks' time. What's the plan from a public relations perspective from your point? I mean, you've done a lot of work going into this. How are we going about trying to avoid to be politicized. Is there a plan just to do anything on that front?

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

Okay. Good morning, Dylan. Thank you. So the first one, I think you actually mean the production costs, not the development costs?

[Dylan Kelly, Research Analyst]

Correct.

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

Is that right?

[Dylan Kelly, Research Analyst]

Correct.

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

Yes, okay. So the production costs. One of the things which we mentioned in here, which is there was a -- at the end of Easter, there's a bit of issues with both payables and receivables. So at the end of the quarter because it coincided with Easter, not everything went out or came in as per ordinary end of quarter stuff because I think Good Friday was the last day of the month or something like that. So there's a little bit of that in there. But generally speaking, the increase in production costs relate to straight up increases, variable costs associated with our forecast increased volumes in this quarter. So it's additional acid, it's additional of all sorts, of hydrochloric and oxalic, in particular. There's been some increase in oxalic acid. And it's directly variable to the amount of NdPr we produce because oxalic is certainly used in NdPr and SEG. So that's really at the heart of the cost increases. Suffice to say that we've got some reasonably intensive work actually going on around that and ensuring that we capture all the benefits from the work that we're doing, particularly around recovery. In terms of elections, as you know, we've spent 18 months, almost 2 years really, working on reputation management, communications and also community-based activities, which we think have put us in a relatively strong position. The election will be on the 9th of May. It's a bit of a nuisance because it's been declared a public holiday as well, so it means that we have to pay a penalty for those who [ are on assist ], and we've got all of our administration staff are out for the day, so yes. But our plan for dealing with this is not to do anything specific during this period. We did all of our paid advertising and scheduled it so most of it -- most of the heavy advertising was earlier this calendar year. In the lead-up to the election, we think it's best to actually stay out of the press during the run-up to the election because anything that we say or any advertising that we place runs the risk of actually igniting an issue which may not be. The opposition sort of continues to try to sort of fan the flames again, but touch wood, to this stage, have not been able to get any traction on that. And so we're really keeping our heads pretty low and leaving the politicians to debate as politicians do.

[Operator]

Your next question comes from Michael Evans from Curran & Co.

[Michael Evans]

I've got a couple of questions. Just the first one on your 5B on payments. Under development, you've got $6 million going out. Is there a CapEx component in that? And secondly, just you mentioned it's the first day that you've got on-spec material from the new cerium and lanthanum circuit. If you could talk more about that and the pricing implications of sort of having that down -- sort of further downstream processing in the cerium and lanthanum. And apologies if you've answered some of my first question, I was chatting to the operator when you're answering Dylan's question.

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

That's okay. No, no. I didn't answer that because -- so the development is primarily mining, and the CapEx is primarily in the PP&E line, which is 2.1(a), so that's essentially the split there. In terms of the La and Ce circuit, the benefits to the La, Ce circuit -- first of all, let me explain what we've done. So previously, we had what we called SX 6, which comes not surprisingly after SX 5. In SX 5, the PrNd and LaCe are separated. And so PrNd goes under a SX 7, where it is further treated and the LaCe went to SX 6. And through SX 6 then, we separated about half of the La and Ce and the other half went straight into the -- through to [ PFS ] LaCe. In addition to that, we had some further circuits that we had been using in solvent extraction through assisting the removal of non-rare earth impurities in those materials, particularly in cerium, which has been part of us being able to progressively improve the price that we've been able to achieve for those products. Now what we've done now is that there was a final -- and for those of you who've been to the plant, when Phase 2 was constructed, there was a third floor added above the ground floor in solvent extraction. And that has a very large circuit, which is called SX 8, which was, I think, at one stage considered for PrNd separation. We're reconfiguring, as part of the project mix, and so we've commissioned those SX 8 vessels to do La and Ce separation, and the freed-up SX 6 then will be used for the PrNd separation. It's more economic, and the volumes are more fit for the purpose and all of those sorts of things. In addition, as part of the SX 8 process, we have also commissioned the additional circuits to do the non-rare earth impurity removal. What does it do for us? I think that the first and most important thing, it allows us to maximize our lanthanum and cerium sales outside of China. And that does give us a better price outcome. So over time, it will also allow us to continue to improve the quality of the materials. But really, the next-stage impurity, a fair bit of that is actually going to rest upon some of the treatment that we do in product finishing as well, and that's the work that we're doing at present. The effect in this quarter is that we've actually, during the commissioning period, had to -- we shut down 1 SX 6 fixed train because there's 2 trains because, actually, demand for cerium is very strong at present as well, and so we needed to continue production for cerium during this period of time, in particular. So we've shut down 1 train whilst we've been starting up SX 8 and then progressively, over this quarter, as SX 8 comes up to full production throughput, we will then shut down the second train and then we'll go through the process of commissioning that old SX 6 circuit for our PrNd separation, which will be commissioned next quarter. Does that adequately answer your question, Michael?

[Michael Evans]

Yes, I think so. If I've got any further questions on that one, I'll take them off-line. So no, that's fine. I mean, on your cash flow, I suppose some of that development CapEx is on the mining. But I mean, the mining is obviously not continuous. I'm trying to figure out your steady-state cash cost and is it still around $65 million a quarter? Would that be a number not too far off the ballpark, including sustaining capital I suppose or...?

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

So hang about. You're probably saying it's a little bit short of that, but in the range of $65 million to $70 million, yes. In the range of $65 million to $70 million, yes. But bear in mind that we're targeting a relatively significant uplift in NdPr production this quarter and on an ongoing basis, and there are variable costs that come with that.

[Michael Evans]

Okay. So going forward for the balance of the year, $70 million might be a better estimate than $65 million.

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

Yes.

[Operator]

[Operator Instructions] Your next question comes from the line of Tim Ainsworth from Telfain.

[Tim Ainsworth]

Amanda, just wondering if you could put a little bit of color around Chinese domestic demand. Exports seem very strong and as do your own comments. But [ AMCO ] report suggests that the China demand didn't increase after the spring festival. It's roughly in balance despite what would appear to be a fair bit of supply constraint at the moment. Just any commentary around China's domestic demand and particularly NdPr, I guess?

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

So in China, there's probably still more illegal material coming through than I had been thinking. I got that from a variety of different sources when I was there a couple weeks ago. So they would say that supply and demand is in balance, but only because there still is some illegal material in the system. And the consensus estimate it's still probably about 30%, which is a bit higher. We thought it had probably gone to sub-20 sort of last quarter. But there's a very, very strong view that the government will continue to drive that down and the price will come up over time. And I don't have any specific sort of quantitative view on the internal demand, but everybody there is pretty positive about what's going on as far as demand is concerned.

[Tim Ainsworth]

Okay. Just NdPr magnets, Amanda, is there more growth in the higher end area of the magnet business rather than the lower end? Are they moving more towards the high quality in the FeB?

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

I don't know that I could answer that really in a learned fashion except to say that the highest-spec magnets and the most technical magnets still tend to come out of the Japanese market and Japanese market is growing like [indiscernible]. That's a technical term. But yes, the Japanese market is very strong. And so as we're seeing growth in some of the new technology magnets there, I don't have such intense insight. But really, I was at a rare earths conference a couple weeks ago in China and there was a very, very good technical presentation. I'm just delighted that they had instantaneous translation because the slides were in Chinese and the speakers in Chinese, and I would have been lost without it, but they did have it. And a lot of focus on application in electric trains and electric ships was a really big sort of area. And the one that I was less enthused about was that how NdPr was the perfect market for electric -- perfect material for electric torpedoes. But certainly, clearly, a lot of work -- so this is the technical guy from one of the rare earths -- the RARE earth association and very, very strong development work going on there. Also, a strong consensus within the industry, and this is part of why we were there was really to participate in this very strong consensus on the need for continued investment in application development for cerium, in particular, and lanthanum because we can't just have NdPr market growth.

[Operator]

Your next question comes from the line of [ Michael Lok ] from [ M Lok Self-Managed ] [indiscernible].

[Unknown Analyst]

In Page 3, you mention about the car electrification. Given that the -- you're not able to satisfy the demand now, and I worked out that with the Lynas NEXT project, you're going to increase NdPr by potentially 800 tonnes per year, do you feel that by 2020, you will be able to satisfy that demand in the global market? And then the second question is in terms of the JARE facility, first, perhaps you can give us an indication how do you plan to reduce that debt in the next 2 years?

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

Okay. Thanks, [ Michael ]. First of all, just to put the numbers into perspective, current design rates for NdPr per month are 440 tonnes per month. So that's about 5,300 tonnes per year. When we finish project NEXT, we expect to be at a sustainable 600 tonnes per month, which is 7,200 tonnes per year. So it is a significant uplift. Now we've been operating at slightly ahead of design rates now for over 12 months, so it's not a full 2,000 tonnes above where we've been. But it's about 1,500 to 1,600 tonnes above where sort of our current run rate has been. So it is a significant uplift. We don't aspire to satisfy 100% of the market. I mean, our intent is to satisfy the high-value segments of the market and to lock down contracts that allow us to know that we actually have those satisfied in the long term whilst, almost without doubt, there will be additional capacity come online via various other players. We expect that we're going to be at the 600 tonnes a month we've said to the market several times by first quarter next calendar year. And as we complete NEXT, we will reassess whether there's a sensible path or whether it is sensible for us to continue to grow throughput or whether growth via other strategies is more appropriate. In terms of the JARE debt, the JARE debt at USD 170 million, most people will recall that we have no fixed amortization schedule for paying down that debt. But we do have an agreement via a cash sweep mechanism that on the 30 -- that is tested on the 30th of June and the 31st of December each year. The last 6 months, we actually made an early prepayment because we had a very high level of confidence in where we were going to finish. This quarter, we will make the assessment, as we come closer to the end of the quarter, as to whether we wait until the end of the quarter to make that payment or whether we pay it earlier. So we would expect it to continue to generate positive cash flow that the JARE debt will reduce in good order over the next [ 6 ] years.

[Operator]

Your next question comes from the line of [ Chris Hughes, ] who's a private investor.

[Unknown Shareholder]

Amanda, hope all's well up there in Kuantan. My question's quite a short one, really just a point of clarification. I understood you were saying in your presentation that the Lynas NEXT is going to lift your capacity to 140% of base capacity. My understanding, base capacity was 22,000 tonnes. But when I do the numbers, it would put you well above your play -- more [ stated play ] and an output of 26,000 tonnes on the Lynas NEXT. So am I correct in assuming that your base capacity should've been something around about the 18,000 tonnes rather than 26,000 tonnes. If you could you just clarify? And secondly, I assume Lynas is not going to go into the electric torpedo business.

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

No, we are not going to go into the electric torpedo business. I was somewhat [ confounded ] that it would be something that was discussed. Anyway, more importantly, in terms of the Lynas NEXT, my comment actually relates specifically to NdPr, which is the way that we tend to think about our capacity at present. So that's the 440 tonnes to the 600. And because you're an accountant, you'll tell me it's actually 136% of capacity, not 140% of capacity, and that's right, and Kam keeps trying to remind me of that as well because he said it's 140%. That's an extra x number of tonnes, and I say, well, I'm in the business of rounding it up, Kam. So it is 140% of the design rate NdPr. In terms of that total capacity, [ Chris, ] I would say that we -- design probably was -- design is at 22,000 tonnes. We had effectively only ever achieved around about the 18,000 tonne, 18,500 tonne run rate. That's not to say we can't get more out as we go. But as we've made certain changes around particularly these additional circuits in the LaCe, that has sort of constrained it a little. But I've also been quite open in many of these reports about the fact that our recoveries on La and Ce are not at design rates. And it is an area on which we continue to work. So -- but our focus in terms of getting the throughput is firstly on the NdPr; and then for La and Ce, it has really been about quality rather than throughput. So yes, 136% of NdPr design is the absolute precise number.

[Operator]

Your next question comes from the line of [ Robert Richardson ] from [ ClearView Retirement ].

[Unknown Analyst]

My question has already perhaps been partly answered, but I thought I'd just throw in the references to not being able to meet the demand for the production demand. And you mentioned in fact for the last 6 months, which I was a little bit surprised about. But I guess what comes to mind is what's after Lynas NEXT? And I know you really don't want to go into that sort of detail, but what about LAMP 2?

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

Oh dear, oh dear. I have been asked this about what's next after Lynas NEXT. And I said, please, just give me a break. No. One of the things that is a hallmark of our success over the last little while has been that we focus on doing a few things very well at any given time. So when we made the decision to invest in Lynas NEXT, it was over a year ago that we really sat down and had a really good look at strategic growth paths and what would actually deliver the best returns for our shareholders and for the company. And there's a variety of different growth options available to us but very clearly this because of the relatively low capital investment saw the throughput increase in NdPr sort of really just blew everything else out of the water in terms of the returns. It will be at least another 6 months before we have finished all of the elements related to construction on project NEXT. And as I said, we're attempting to do this in a very, I would like to think, clever way but certainly careful way by using our own personnel in both the engineering and the management of the project rather than bringing in an external engineering team who actually don't understand our assets and don't understand the way they operate. That means that our production team is very fully loaded at present. And whilst there are those who would like to sort of think of that, well, how do we take the next stage and the next stage in terms of throughput, we really have been working to stay very, very focused on doing what we're doing now and doing it well. Whether we do a next phase growth phase, which is primarily about increasing throughput or whether we choose some of the other growth paths will be something that's sort of at the leadership level we start to investigate -- well we're sort of starting to investigate as we look at the various options. But bear in mind that a further increase in NdPr throughput will bring with it 1 kilo of lanthanum and 2 kilos of cerium. And we need to understand very clearly how we place those in the market for sort of further growth of NdPr to be sort of a sensible strategy. So we don't know yet other than what's next after NEXT except to say that it is not our intent to stand still once we have NEXT in place. But we will brief the market accordingly once we've actually done our proper diligence on that.

[Unknown Analyst]

Amanda, perfectly happy with that, and again, I congratulate you on the achievement of Lynas NEXT at such a modest cost.

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

Thank you, [ Robert ]. Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Richard Winkler from UBS.

[Richard Winkler]

I wondered what you thought when you saw the headline that Japan had discovered what they termed an infinite amount of rare earths off their shores? And specifically, is that something that is even economically feasible to get at? And if it is, given your ties to Japanese, they've significantly backed you financially, would Lynas ever be involved in something like that?

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

Yes, those are all big questions. There was a lot of publicity a couple of years ago for the rare earths deposits that were found on the moon, which, at that time, when the NdPr price was $31 a kilo, I really had a chuckle over. This is an important discovery, but there's -- I read a variety of different reports last week. And certainly, the most important said, at present -- because this is so deep, that this is like 100 meters, I think it is, or something like that, 100 [indiscernible]. I can't remember exactly where it is. But it was so big that we actually don't know that there's a technology to recover that material right now. But it is an interesting development. And I think what it does do each time there are further deposits found is it continues to give users confidence in terms of resource security. But our assessment, well it will be many years before that deposit could be exploited. And we know from our own experience that rare earths are difficult to produce in a way that delivers commercial return. So I think that, in some ways -- in many ways, it's actually quite good. It gives the industry confidence. But at the same time, it does highlight the quality and cost competitiveness of our deposit where we're only actually having to -- sort of basically we blast a small amount of overburden. And then we basically put a digger in. So it's one of those things, the rare earths industry likes to get a bit excited about things, I think it is important that it's been discovered. But I think it will be a long time before it actually, if ever, affects the market or our business. Are there any more questions?

[Operator]

We've had one other private shareholder wanted to ask [indiscernible] name yet, so far. Are you going to take the question, Amanda?

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

Sorry?

[Operator]

We've got a caller who hasn't given their name for us to announce who they are. [indiscernible] happy to take the question?

[Unknown Executive]

There's a shareholder, we don't know their name, are we happy to take their question. Yes, I think we'll take the question. Thanks.

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

Sure.

[Unknown Shareholder]

It sounds like the report was pretty good because everyone's congratulating you, Ms. Lacaze. But I can't find it on your website, so I've just been listening to the editorial. I would hope that it's going to get on Lynas Corp soon. Can you hear me on that question?

[Unknown Executive]

Sure, yes. It's on www.asx.com.au under LYC. We're based in Malaysia, so our admin staff is just posting it as we speak. It will be up on our website as well shortly.

[Unknown Shareholder]

Okay. So last quarter, you did 1,222 tonnes of NdPr and 4,100 tonnes of total REO. What was your production this quarter?

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

1,332 of NdPr and 4,100 tonnes in total.

[Unknown Shareholder]

Oh good, okay. It's just a little frustrating here. I like the -- it sounded like it was a good quarter, and I'm glad it was.

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

Thank you.

[Operator]

We've got no further questions at this stage.

[Unknown Executive]

Thank you. With no further questions, that brings us to the end of the Lynas call for the third quarter of FY '2018. Thank you very much for joining us today.