Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Transcript 2019-Q3

[Operator]

Thank you for standing by, and welcome to the Lynas Corporation quarterly activities report briefing. [Operator Instructions] I would now like to hand the conference over to Jennifer Parker. Please go ahead.

[Jennifer Parker]

Good morning, and welcome to the Lynas Corporation briefing for the March quarter 2019. Today's briefing will be presented by Amanda Lacaze. And joining Amanda are Andrew Arnold, Company Secretary and General Counsel; Gaudenz Sturzenegger, CFO; and Professor Dr. Ismail Bahari, General Manager of Radiation Safety, Regulation and Compliance. I'll now hand over to Amanda Lacaze.

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

Good morning, everybody. I seem to be speaking with you all with monotonous regularity these days, and I hope, I really hope that you don't get like my kids and just get sick of the sound of my voice. I especially hope that today, because as we reflect on our quarterly operating results, I really want to highlight the outstanding effort of our operating teams in our business. Our production team, our sales team, finance, procurement, engineering, maintenance, safety, all of these teams have really put in an outstanding effort. As you know, we have a very full agenda at Lynas, and we are a small team. So we mean to ensure that we are focused on the things that really matter. And for us, that is about building value in the business. Now I know that you can all read and no doubt have already read the quarterly report, but I want to just highlight a few points. As I said, I'm delighted to share our results. It was another record quarter with record production outcomes and strong financial results, which were driven by our Lynas NEXT improvements. The Lynas NEXT program is a good example of the fact that we are careful. We do manage carefully capital which is -- we do -- sorry, blah, blah, blah. The Lynas NEXT program is really an excellent reflection of being good stewards of capital and our ability to deliver what we say we're going to deliver, and it has underpinned the improvements that we see in this quarter. And because we were able to deliver excellent production results, that has allowed us to mitigate the effects of the ongoing market softness and continuing uncertainty in China. So many of you will recall that one of the key targets of the Lynas NEXT program was to take our production from design rate of 440 tonnes per month of NdPr, to a consistent delivery of 600 tonnes per month. Because we had a slow start-up after the complete shutdown of our plant in December, we did not achieve the 600 tonnes in January and February. Those are 28-day months so it's always -- notwithstanding, I would like that not to matter. It does matter because production is based upon daily outcomes. But we are back over 600 tonnes of NdPr production in March. And this is the third time that the company has achieved this target, and we are confident we can sustainably produce at that rate. I got a real buzz actually because there was 1 day during the quarter that PF produced 28 tonnes of NdPr, which was a new daily record, and I can remember the time when we were having trouble actually getting 3 tonnes a day out of our production lines in PF. We've not added any additional throughput capacity there. We've added, as part of NEXT, some capability around our Nd -- separated Nd and Pr, but it is 4 trains and at 28 tonnes a day, so just a sterling result. Of course, we can't always feed at that rate, so please don't any of the analysts here put 28 tonnes a day into your models. Our record -- our total REO production was a record of 5,444 tonnes. That was up on just over 4,000 tonnes in the previous quarter, and the NdPr production at 1,591 was an increase on the 1,233 tonnes. One of the other significant plans of the Lynas NEXT program was the addition of separated Nd and Pr to our product suite. And as I've explained previously, there are 2 reasons to doing this. The first is that it allows us to meet more of our current customers' needs, and the second is that it allows us to enter into some new segments. This quarter, we've delivered the first production and sales of separated Pr. You may recall last quarter, we showed you the picture of the separated Nd, which I thought is rather a fetching, sort of, light purple. The Pr oxide is not my favorite color, but it is a rather lovely, lustrous black in real life. And so we completed first production and sales of that material. That new Nd and Pr separation circuit. This may have been one of the areas where maybe we were a little optimistic about the speed with which we could bring that circuit up to operating at design rates. And it operated at about 70% of design across the quarter, but it had got to about 90% by the end of March. Bearing in mind that managing the parameters of that is a new challenge for us because the specs, the quality specs around both the separated Nd and Pr are really very tight. We had strong financial results despite the continued weakness in the market price. We had our sales revenue over $100 million, and that's one of the best quarters that we've delivered, notwithstanding that the price is a lot lower than it was in the previous quarters where we've delivered over $100 million in revenue, once again, a reflection of the fact that the excellent production allowed us to mitigate that. We've already told you about our principal repayment made in January, and our closing cash balance of $67 million after the principal repayment. You also need to take into account that because of the profile of production, some of our sales were made late in the quarter, which means that we've gone into this quarter with more outstanding -- more receivables than we might normally do. Demand in Japan remains strong during the quarter. I had-- did a visit there with Pol in about the middle of the quarter. And the market is strong, and our relationship with our customers is even stronger. As we go into the next quarter, I just want to flag that we've -- given the continued weakness in market price, we will be reserving all of our NdPr for our strategic business partners, and that may lead to some inventory build. Mt Weld. Our Lynas NEXT initiatives continued as did our third Mining Campaign, which is running ahead of schedule with main or delivery on schedule for the June 2019 quarter. And once again, you can see that we've got a shot of the blast. Kam says that he likes to take pictures of that because he knows I like to look at blasts. I'm not sure that that's necessarily the case, but anyway, it is always cool to see the work in progress. Two other things which I think are material with respect to the Mt Weld operations. The first is, we do have a very significant metallurgical team who have been doing a lot of test work, and particularly around the Duncan ore, which some of you will recall used to be treated as a separate reserve but which we -- with the work that we've done, we understand that we can actually run that through the same flow sheet that we're running the CLD ore through. If enriched in heavy rare earth, and as we flagged in the report, Heavy Rare Earths prices, dysprosium and terbium, are starting to move in the right direction, which is why we recommenced sales of our Heavy Rare Earths blend, SEG. So the good news for us is that we will be able to include the Duncan ore into the mill feed blend with the Campaign 3 ore. The other thing that we're also doing is that we are mixing some of our highest grade ore directly in with the concentrate to be directly cracked. What's the effect of that? The big effect is that it allows us to avoid the recovery losses that we get through the flotation process. So operationally, I am delighted with the results, and I am in awe of the resilience and focus that our operating teams brought to the business. I know the questions on your lips will be all about the Malaysian regulatory situation. But at this time, we have nothing further to add to the comments that we made last week. We continue to engage productively with the regulators, and we are committed to Malaysia, to our people and to continuing to make a positive contribution to the Malaysian economy and Malaysia's strategy of growing strongly in the 4.0 industries. As we indicated last week, following the successful implementation of the Lynas NEXT initiatives, we are working on answering that other question which has been on your lips for about a year which is, what's next after NEXT. Apart from me having to think of a new branding strategy, the company has been working for some time on a growth plan that could see production material increase and at the same time assist us to mitigate future regulatory risks. We haven't made decisions on this at this stage, but we look forward to updating the market on our plans in the coming weeks. So an excellent quarter with the operation teams not being distracted in any way from the things that really matter, which is about building the value of our business for all of our stakeholders. So with that, I am happy to take questions.

[Operator]

[Operator Instructions]Your first question comes from Dylan Kelly from CLSA.

[Dylan Kelly, Former Research Analyst]

Congratulations on a great result after a -- was it a standing start in December. Two questions for me. I'll be strict and I won't ask the topical questions. Firstly, just on your comments on the second page of the release relating to the NdPr inventory and potential build in the fourth quarter. Exactly what was the size that you may be envisaging there? And how much inventory would you anticipate to be sort of left with? And secondly, just on the cost base, just want to understand, number one, how that cost base has changed with the increased scale? It looks pretty good on, what is it, $66 million, including admin. I just wanted to know what that GST receivables on that was and expectations in the coming weeks and months as to what we can expect in terms of the stabilization at this revised run rate.

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

Thanks, Dylan. We're not going to disclose explicitly the amount that we expect the inventory to build. But we are flagging it because it will be more substantive than on previous occasions, and I think it is prudent. Across the time that I've been in the company, there have been times where we've been compelled to sell virtually every kilo as it comes off the line, and we have a little more discretion on that at present. And we certainly want to ensure that we are meeting the needs of our strategic customers who have held our hands tightly right from when we first started activity here. With respect to the cost base improvement, and I'll let Gaudenz to say some here. I think that everybody who's followed our company would know that we have a strong track record on improving our cost, and it is part of our DNA to continue to drive costs down incrementally. The big kickers to the improvements in cost -- and it is always tricky, as you know, comparing cash versus sort of actual costs -- but the big ticket to the improvement in cost is the improvement in recoveries. And then of course, on a cash basis, the receipt of some of those GST receivables that have been outstanding for some time has certainly assisted. So I'll just get Gaudenz to follow that up.

[Gaudenz Sturzenegger, Chief Financial Officer]

Yes. Perhaps on the GST question, about half of the gap -- the show compared to the prior quarter was GST. So about -- that's been $0.5 million, and that's obviously reduced the remaining outstanding quite a lot. So I think we are pretty clean on that page. On the cost base. So obviously here, what we indicate is the cash flow, which was definitely also impacted by the profile we have seen, production profile we have seen in December. But overall, I think as Amanda was indicating, we really see kind of the benefits of the project NEXT flowing into the data, and particularly on a per unit basis, we would expect a similar trend going forward.

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

So Dylan, just one thing on the sales in this quarter, just to be explicit on this. We can sell what we've made. We just may choose not to do it at the current prices.

[Operator]

Your next questions comes from Matthew Chen from Foster Stockbroking.

[Matthew Chen, Equities Research Analyst]

Just wanted to double check with that on -- just on that inventory issue. Did you hold anything over the last quarter in quarter 3? Or is that a decision going forward?

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

Nothing significant. Maybe the best way to describe it is that in the days when we were really sort of managing as many -- daily cash very carefully, we would often finish the quarter with less than 10 tonnes in inventory. We now run an inventory level which is in the tens of tonnes, not the hundreds of tonnes on a normal basis, which is a much more proper way to run a business of this sort. So yes, we had inventory carried over at the end of the quarter, but not substantial.

[Matthew Chen, Equities Research Analyst]

Yes. Okay. I recall maybe like, the end of Q3 or Q4, something similar, where you had done 100 tonnes in inventory.

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

Yes, yes. So...

[Matthew Chen, Equities Research Analyst]

And sort of, it -- we will be getting to that level, I think is the -- is what you're alluding to, I suspect.

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

Yes. And it's a reasonable number for a business which is running in the way that we're running, to be holding rather than, sort of, rushing everything out the door, sort of, the minute that comes off the end of the line.

[Matthew Chen, Equities Research Analyst]

Yes. Okay. And just on -- I missed that -- the bit on the strategy to crush and screen and blend DSO ore. Could you talk a little bit more about that? I think I got what you were saying, that you're saying you're blending Campaign 3 ore, directly bypassing the flotation, going straight to LAMP?

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

Okay. So not Campaign 3 because that ore hasn't come out yet. But we do have, and I think, once again, those of you who have followed us for some time will know the quality of the Mt Weld resource, and some of it is very, very high REO. And so we are blending that at a relatively low rate into our concentrate, and that allows us to get a -- an uplift in -- and that's not shown in quarter 3 at this stage, but it allows us to get an uplift in recovery because we don't have the recoveries losses through the concentrate.

[Matthew Chen, Equities Research Analyst]

Okay. And just on the recoveries. So I take it that that's still seeing improvement because I think that's sort of been implicit improvement over previous quarters.

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

Absolutely.

[Matthew Chen, Equities Research Analyst]

Pending. Yes?

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

Absolutely, Matt. We've really -- whenever you look at what are the levers that make a business of our sort successful, of course, price that's not exclusive to our business. It's the biggest lever really, in any business. But in terms of our cost base, any improvement in recoveries is absolutely golden, and our operations team is 100% focused on that. And a large portion of the Lynas NEXT initiatives in Kuantan really were about the areas where we were observing the biggest recovery losses -- where we were observing the biggest losses previously. And things like the heat exchange and the MgO neutralization circuit for example, which allows us to control the heat, and therefore, to also be able to control the pH. And by doing those 2 things, we improve the recovery rate.

[Operator]

Your next question comes from Tim Ainsworth.

[Tim Ainsworth]

Great result. Terrific to see the realization of so much of the Lynas NEXT work flowing through. Just a question on the inputs to LAMP through the quarter, Amanda. Was that 25% of the currently permanent imports?

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

Oh, Tim, I actually don't, off the top of my head, know the answer to that question.

[Tim Ainsworth]

I'm just wondering how you're balancing out the feed across the 12-month period, without any indication that the inputs will be increased there.

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

So just to provide clarity on that. As you may recall, we -- there are 2 conditions. One is the amount of lanthanide concentrate that we can import, and the AELB approved an uplift in that last year. The second is our DOE approval for the amount that we can process, and we are working on the basis that, that will be resolved as we resolve a number of other matters with respect to our updated EIA that this out for comment at present. So we're not seeing -- we're certainly not planning that in December this year. We're going to be shutting down the plant.

[Tim Ainsworth]

Okay, sorry. I mixed those up but you answered my question anyhow. Just the other one, Amanda. Just feeding the Duncan ore, the Dy and Tb, interesting development. Are you looking to realize the value on that through tolling, perhaps? Is that an option a little bit further down the track?

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

So we are looking at a number of options. As we engage with our end users of the magnetic materials, particularly for use in the automotive market, the ability to confirm our supply of the heavies alongside the NdPr is a matter of great interest to them. And so we're looking at a number of different tolls to do that. Suffice to say that right now, it is appealing to us to increase the amount of SEG and the proportion of Dy and Tb within that SEG. And it gives us a good price outcome.

[Tim Ainsworth]

Okay. Just quickly, the reports say the southern ionic clay areas in China have been shut down or severely limited. I can't see any commentary on whether this is a permanent occurrence or whether it's a temporary one while they clean things up a little bit. Is there any indication as to the permanence of the heavy metals coming from the ionic clays?

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

Yes. I can't really speculate on that. I think that what we see, and we've said for some time, what we see out of from China is a determination to clean these things up. But I don't even like to speculate on Australian government policy, much less Chinese government policy. So -- except that I would say that the Chinese people are keen to see better environmental outcomes in China.

[Tim Ainsworth]

Fair enough. I just -- looking at it, the price increases on Dy and Tb seem to be more supply-constrained than demand-driven at the moment. So it's an interesting one as to where that all comes out.

[Operator]

[Operator Instructions]Your next question comes from Andrew White from Curran & Co.

[Andrew White, Resources Analyst]

I was just -- wanted to ask about how consistent global sales of Pr and Nd be into the future. I saw obviously, you just made a comment on this call about Nd being produced previously and then Pr being produced in this quarter. Have you got long-term contracts for this sort of material?

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

Yes. So we're very confident with this. The Nd, there are still some customers who produce pure Nd magnet, and so we have agreements with those customers. So we can place all of the Nd and Pr that we produce pretty much before we produce it.

[Andrew White, Resources Analyst]

Yes. Okay. I understand. And I think you pretty much answered the next question I had on the SEG. I was just wondering, it seemed previously that you are holding this material back due to pricing. Have you seen the pricing improve for these products?

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

Yes.

[Andrew White, Resources Analyst]

And also on this as well is just about the specifications you have to have for that SEG. Is it pretty fixed, the specs? Or can you -- it seems that you can increase the -- just pricing on that, is it?

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

So the answer to the first question is yes, the price has improved. Over the past several quarters, we had made a very simple -- at the beginning of each flowing, Pol and I sit down and we say, okay, if anyone's prepared to pay x, we'll sell it. And if they're not, it's going to stay in our warehouse. And so that started to move in -- absolutely in the right direction. Because we're not selling a separated product at present, and bear in mind that SEG, Heavy Rare Earths separation, the only place currently we can do that is inside China. We actually sell that on the basis of proportion of material within the SEG. So it gets priced basically on how much europium, samarium, gadolinium, terbium, dysprosium is in there. So if we have an enriched material with more Dy and Tb in it, then we will sell it for a higher price.

[Operator]

There are no further questions at this time. I will now hand back to Amanda Lacaze.

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

Okay. So once again, thank you all for joining us. And at the risk of repeating myself, I am incredibly proud of the Lynas team and the results that they have delivered. And I'm incredibly proud of the fact that I can, sort of, say to you that the money that we spent on the Lynas NEXT program has absolutely delivered on the objectives that we had. So thank you all. And no doubt, I'll be speaking to you again soon.