Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the Lynas Corporation's Fourth Quarter Conference Call for the 2018 financial year. Amanda Lacaze, CEO and Managing Director of Lynas, will present the report this morning and will be joined by Gaudenz Sturzenegger, CFO; and Andrew Arnold, General Counsel and Company Secretary. I'll now hand over to Amanda Lacaze. Over to you, Amanda.

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

Thanks, Jane. Good morning, everybody, and thank you for your continued interest in our company. It's always a pleasure to know that we've got so many people who join these calls. Kuantan is beautiful again today, and the forecast is it will be hot as it is for the other 364 days of the year. But that's just a postcard from Kuantan. So most of you, I believe, will have read the report. Let me just pull out a few points that I would like to make, and then I'm very happy to take your questions.So operationally, we would -- we say with great confidence that, during this quarter, we have proven the capability for our plant to work consistently at over 500 tonnes a month. In -- the result is not 1,500 tonnes because, in April, we had a full 2 weeks where we had significant interaction to the local water supply. This is the second time this year that it happened. The effect was significant. We estimate at least 100 tonnes of lost production from NdPr. We have commenced the process of engineering additional water storage pond on site to give us additional buffer. We'll be able to fund that. We've seen the CapEx envelope that we've already indicated to the market for NEXT, for the Lynas NEXT activity, and we expect that it will be operational by the end of this calendar year.During the period of time that we did have the interruptions, we did take sort of heroic actions, including tracking order in and including running a pipeline from a bauxite pit that's full of water just down the road where that water is actually really quite good quality, but it wasn't sufficient to make up for the fact that, at times, the water supply, the main water supply, was actually at 0. So it caused us to have to shut down parts of the plant, including the SX 5 circuit on a number of occasions during the period where the water supply was intermittent. But the other thing, I think, also which gives us a great deal of confidence about the ability to produce at that rate is that, during this quarter, as indicated in the report, we did a lot of upgrade work for Lynas NEXT. Most significant work was undertaken in our cracking and leaching area, including in April a full 2.5-day shut of all cracking and leaching activities. Despite that, we still produced in excess of 500 tonnes in April. And so it gives us confidence that we can certainly manage planned shuts very well. It's the unplanned shuts which give us a little bit more of a headache and, as I said, where we're putting in a little bit more sort of buffer and surge capacity. In terms of the work that we did in cracking and leaching, it included replacing [ water bay ] materially unreliable stage conveyor belts to cracking and leaching. It also included some significant works around our MgO neutralization activity as well as work which is designed to improve the reliability of our waste gas treatment plants. So the other big piece of work was that we commissioned our large SX 8 separation unit, which allows us to now separate up to 75% of our lanthanum and cerium. I'm very proud of the work from the team. That work was undertaken with minimum fuss. It was producing on-spec product within a very short period of time. And I think you can see in certainly the total tonnes produced that we're already seeing a benefit to the recovery rates on our non-NdPr products. So operationally, it was a good quarter, only affected really by the water issues during May. In terms of the market. As we've indicated in the report, the market still, and our customers in particular, are still evidencing very strong demand. In the Japanese market, within the last 2 years, demand has increased by close to 50%. And part of that is us growing our share of our key customers in that market, and the larger part of it is increases in underlying demand.During the quarter, we had a relatively stable market price on average, but with some fluctuations within the quarter. One of the things that we talked about quite a lot is sort of our pricing and contract strategy and how that might add additional value to the business. And I've had a lot of investors and analysts who've asked for more detail. I've actually said we're not going to give you a right down to the dollar with different customers detail because we don't think that that's particularly helpful. There's a lot of value to be had from pricing. But I think one of the things which is important is that the contracts are about ensuring that we fix the flaws so we don't go through some of the sort of more difficult times that we've had before, but it doesn't prohibit us from capturing upside as the market moves. And I think that if you look carefully at our results in this quarter, you will see the -- us starting to show the benefit of our sort of developing portfolio, particularly of customers. So if you look at it just quarter-on-quarter versus last quarter, we've actually sold less tonnes in total, and the market prices has averaged sort of a stable number. Yet our received price and our total revenue was up. So on about the same number of tonnes, our revenue is up by -- our invoice revenue, not our cash -- our invoice revenue was up by about $6 million. And that really has to do with the balance of our portfolio and the type of agreements that we've put in place. Of course, the other thing to take into account as you're considering this is that those numbers could have been higher again, but we now have the financial capacity which we haven't had before to choose when we sell our NdPr. So those of you who've been around for a while, when we were sort of really got us in a breakeven situation, we sold every kilo of NdPr as it came off the line, no natural watch for price dynamics were at the time. We now have sufficient sort of financial strength to be able to make some choices on when we sell. And this is the first time in my tenure or in the history of Lynas where we have actually made a choice to hold inventory of NdPr over the quarter end rather than doing everything we can to credit to give us some sort of at times over the last 4 years where we really just needed the cash. So generally speaking, the market has been sort of reasonably unremarkable with the exception of the very strong demand out of Japan, and that is a very good thing for our business.The third area that I'm just going to make a few points on some of the external factors[Audio Gap]the review of -- the new review of the [ One MBB ] matters. And Lynas is one of many areas that potentially will be reviewed. And we're very confident in terms of our ability to participate in that. We are compliant with all our license conditions, both here in Malaysia and in Western Australia. We had implemented all the recommendations from the International Atomic Energy Agency and the Parliamentary Select Committee. And we have lodged a comprehensive plan to the management of our solid residues. So that's really all I intend to say about the political situation in Malaysia. We just restate that we hold ourselves to a very high standard, and we're confident about our ability to participate in any review.The second area that people ask about is the announcement a couple of weeks ago that rare earth were included on the $200 billion list of products that would potentially have a 10% tariff associated with them. Now it's important to note this is not certain, there's a period of consultation before anything actually happens. But my view -- our view on this is that what it does mean for us is that policymakers, particularly in the U.S. are thinking about rare earth. And indeed, policymakers in Australia are thinking about rare earth. The U.S. -- and I just sort of highlight again, the U.S. and the Australian governments' joint release on cooperation on critical minerals in rare earth that came out earlier this year. Up until now, for a lot of these people, rare earth is being seen as a relatively small and opaque market. And our observation would be that the first step for the policymakers in both jurisdictions is to really understand the dynamics of the market and understand the implications. As people who live this every day, as I said to someone, we know stuff and we're very happy to share that knowledge to help to support good and positive policy. I think that if you read sort of a number of the different articles that have been written, there's an increasing recognition that it's none about just stuff in the ground, it's actually about the supply chain. And for those of us who are Australians, we've lived for years with sort of the rhetoric of this is we don't want to be the world's quarry and the world's farm. And in a lot of mining instances, we still are the world's quarry. But what we're doing here is that we are actually adding value to the material that we take out of the ground in Mount Weld. All of this sort of international focus on rare earth supports our thesis. Our business is in a very good position. Demand and use of the product will grow as consumers look to grow their use of high-tech and also green technologies. We are the only supplier outside of China that adds value to our own resource. We have knowledge of the market, and we have first-mover advantage. So we see ourselves very well placed to take advantage of our continuing market growth.A couple more points which I think you'll be all over, the balance sheet continues to look in much better shape. Senior secured debt now is sitting at USD 150 million following the early payment of $20 million. We still have in excess of AUD 40 million in -- within the company, and that's because certain monies are not subject to a cash sweep. And I think, finally, to really say that we're sitting here very confident that the long-term thesis on our business remained solid. We are a growth business. We are exposed to really strong growth segments, but we're -- for anyone who's seeking to have exposure to some of those segments, we're quite a de-risked investment compared to some of the other start-up options or some of the other materials because, for example, if you want to be exposed to the automotive industry, technology development, rare earths are in ICE vehicles. Those same rare earths are in hybrid vehicles plus a bit. Those same rare earths are in plug electric vehicles plus a bit. And then finally, as the market does move into battery electric vehicles, it's more. But we already have a business, we're not just waiting for battery electric vehicles to have high penetration and then the magic will occur. So our belief in the long-term thesis is strong. And we're very confident about the actions that we've taken within our own business to prepare it so that we are able to optimize the returns in that higher-growth environment. So I'll stop there, and I'm happy to take questions.

[Operator]

[Operator Instructions] Your first question is from Cathy Moises from Patersons.

[Cathy Moises]

Just 3 questions, 2 very quick ones, slightly longer. The first one is if you add back the 100 tonnes you effectively lost in May due to the water, you're tracking well above the 500 tonnes per month target. Can you talk to how much above that we can be expecting in the September quarter? And secondly, the very quick one, the cost of the additional water facility in Malaysia. And the third one is the policies on the line. You've held 100 tonnes, doesn't flow through to cash flow this quarter this year. Obviously, you had a lot of catch up from the previous quarter. Is it going to sort of flow through into the September quarter and sort of be canceled out or are we going to see a reduced revenue in September quarter? And if we just talk to the seasonality a little bit in that we have seen some continued weakening in the NdPr price over the last few months and, on my reckoning, that's purely a seasonality, so it's probably a really good entry point.

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

Okay. Thanks, Cathy. Welcome back. So yes, you're right, if we add back that 100 tonnes, and I can't tell you how much gnashing of the teeth and sort of weeping there was over that, we are well above the 500 tonnes on a run-rate basis. Look, I know that you would love me to put an [ exact ] number on it, but we would expect to be in excess of the 500 tonnes each month. Not the least of which is that we've got 2 more days in this quarter than we had last quarter. Last quarter, we had 2 30-day months. And this quarter, we got 2 31-day months. So that actually does make a difference when you're producing at sort of a range of somewhere around about 18 tonnes a day. So I think that that's all I would say. But we're pretty confident, and the Lynas NEXT changes have been significant and are already showing through particularly in things like recoveries and also in reliability. But the recoveries piece is incredibly important, and a lot of the investment that we put in, and we'll show you this when you're up here on Monday, into the MgO neutralization area, including the new heat exchanges really had a direct impact on our recoveries. The cost of the dam, as I said, we'll actually be able to do that within our previously forecast project NEXT expenditure. It's somewhere in the order of about MYR 3 million, which is sort of about AUD 1 million. And then, in terms of the seasonality and otherwise, you're right. Typically, although it always sort of does my head in a bit. There is a bit of seasonality towards the back end of the year. And yes, we sort of thought about that a little as we thought about do we move this product out of the door now or do we sort of hold on to it. And there is sort of this cause there's quite a few things going on in the market which we think -- we just -- I guess we thought that it was just a good idea to hold that a little bit extra. We couldn't have held much more because as I indicated, the Japanese demand was strong, and we always meet this demand from our Japanese customers, and we will continue to do so. But we will actually see that product, we would expect being sold in this quarter, which is historically a pretty strong quarter in terms of the seasonality of the market. So Cathy, the bottom line is it's likely to be positive to this September quarter result.

[Operator]

Next question is from Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

Just a further question on the 100 tonnes. Can I ask for maybe some color on what proportion roughly you're selling into these Japanese customers which are clearly your preferred angle versus other? Just trying to get a sense. Obviously, that's still growing your production base at NdPr towards that 7,200 tonnes per annum. Just wondering is there, in the next couple of years, any risk of the market not being there yet to fully absorb that volume while we wait for electric vehicles to ramp up? Or are you confident being able to place this? Just trying to understand that piece.

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

Daniel, thank you for that. We're 100% confident of trying to place it. So for now 9 months, we have actually been carefully allocating the material that we produce. We could sell more every month than we sell today. So we always prioritize Japan. We don't disclose exactly the share of our business that Japan represents. But the strong growth in the Japanese market, what I can say is that our -- as an indicator that our 2016 agreement with JARE saw us agree to preferentially supply, so long as it was not on any negative commercial terms, up to 3,600 tonnes to the Japanese markets. And we would also indicate that, that's not looking very [ thorough ]. So that would be sort of that situation, but we certainly can sell. And I guess your point about because it takes until the electric vehicles come online, no, it doesn't. And that's why we're derisked against, say, maybe some of the other materials which are used in, say, electrical vehicle batteries or otherwise, which are really waiting for that sort of boom. We are exposed, in my own view, is that consumers don't leap, they take steps. And so, one of the things which is driving the buoyancy in the Japanese market is that growth of hybrids is very strong there. So just remembering that, in a normal ICE vehicle, you have rare earths in many of your electronic motors that drive the various electronics, you also have rare earths in your autocat system. When you move to a hybrid, you've got those materials, and you've also got additional rare earths in your batteries, which are used in hybrids. Then I think the next step will be a lot of plug hybrids so that they will have -- they'll be plugged in electric power, but they will still have gas, and then ultimately, you'll have the battery electric vehicles. And we are exposed at each stage along that path. And so there is buoyancy in really the automotive sector. Other cars being made and actually every one of them has rare earths in it. So we're feeling pretty positive about that. And then, of course, the other side is electronics where electronics and automation continue to grow, and we're highly exposed to that. So we're not waiting on sort of the electric vehicle thesis to kick in because we have existing business in existing use.

[Daniel Morgan, Director and Analyst]

Can I just ask perhaps a follow-up question on this point? So NdPr you've not sold 100 during the quarter. I'm just curious when you are selling your product, do you ever detect -- because given that you are becoming or are now one of the dominant market players, do you detect when you place volume whether it has an impact on the market price at all that we're seeing? Have you detected that at all?

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

Not really. And it's one of the things that just sort of I find as an ongoing annoyance in this sort of silly published price because I read something in Asian Metal not long ago where they came up with a price and the actual article said that they've spoken to a trader who is -- told them that he'd dump them at a place at a particular price. And then they said, his normal volume is 20 tonnes a month. And I'm like, why should -- and this is classic tail wagging the dog, and it's classic sort of issue around that whole published price rather than pricing for value within use. And that's the reason why we're moving to value within use because we don't want our business determined by what some trader in the South of China who sells 20 tonnes a month says.

[Operator]

Next question is from Chris Hughes, a private investor.

[Unknown Attendee]

Congratulations on your efforts in the last quarter. The report I think is probably the best to date that I've read from Lynas. The underlying strength in the business now and inherent strength in the business is obvious and I hope everybody who reads the report will appreciate just a lot of great efforts gone into to where it is. I have a couple of questions. The first one relating to 1 sentence in your written report which makes reference to some participants in the market, relying on volatility in the price chain for the business model. I'm not sure whether you had prepared to elaborate further on that. Are these people manipulating prices, obviously, to their own personal benefit and what's their long-term strategy? The second one relates to your cost of production. You're aware that I track the costs on a quarterly basis and, admittedly, it's driven off your cost statements, your cash cost statements which is not -- not a perfect metric, but[Audio Gap]more trader and some in China. I mean, I think I've said this before. I've not met too many billionaires in my life, but I've met -- but the largest number of billionaires that I have met are actually Chinese who made their money during the 2011 crisis. And that is because they had inventories, and they release them at the right period of time. So in -- within China, in particular, there are traders. We don't sell any stock, just to restate this. I've said it before. We don't sell any stock to traders. We only deal directly with customers. But there are traders who will buy a couple of containers of rare earths and they'll hold them, and there's a lot which happens in the market which is based upon speculation and rumor and then they'll sort of sell them when they see that the price is at its best number. So they're not necessarily like the big firms in China who certainly are very focused on creating a strong and healthy rare earths market or even the Chinese government which is doing the same. So anyone who is sort of operating within the market as a trader is actually always betting a certain amount on that they will be able to trade opportunistically based upon some of the rumor and speculation. So that's really what I was talking about, and the fact that they do sort of operate in the market contributes to the volatility. In terms of cost of production, Gaudenz is here, and I'll give him a chance to speak to it as well. But because you are doing this off the cash that there are some timing implications in what is -- what we're looking at in this quarter. So I'll just hand over and let Gaudenz have a few words on that.

[Gaudenz Sturzenegger, Chief Financial Officer]

Yes. Thanks for the question. I think as you indicated and Amanda also mentioned that this is the cash outflow, so obviously the cost as such looks a little bit different. So at the moment, we have quite some movement also on next related on the inventory side, which is pushing the absolute amount up. Also when you implement a big new change like we have it with next year, you will in the beginning have some inefficiencies in it which over hopefully a pretty short period of time, they'll work it out. And I think that's also what you are seeing in the forecast. So we are let's say taking this down again from a cost point of view. And as we also indicated, we have quite some timing issues on the indirect tax collection side which, as you might know, we have a big change here in the country and that there is just probably a little bit timing noise in that one. But we would definitely expect going forward to normalize the cost again to the levels you have seen before or hopefully better than that.

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

Yes. We would say to continue to incrementally drive the cost down, particularly as we increase sort of production rates. Balancing that out is the fact that as we move into sort of new wars, we had some balancing factors around concentrate grade which sort of affects the cost as well. But on sort of on an overall basis, our objective is to continue to get incremental benefits in terms of cost.

[Gaudenz Sturzenegger, Chief Financial Officer]

And I think also an important one is to remember on the cost FX split and, as you will remember or know, going back a little bit with the Malaysian ringgit, it has relatively come up to the other currencies. So that's obviously having a negative headwind. But I think at the moment, it has pretty much a better life and let's see where it goes, but that obviously has an impact as well.

[Operator]

Next question is from Campbell Andrews from Baron Corp.

[Campbell Andrews]

I just wanted to ask you to elaborate a little bit on your supply chain. So my understanding is that whether your end customers are in Japan or maybe Germany component manufacturers, but on the way to getting to them, there's intermediary processing mainly done by Chinese firms. Is that understanding correct? And if so, do you see any issues with those intermediary processes in China being caught up by tariffs?

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

Okay. So if we separate the 2, the 2 primary supply chains, there's the magnet supply chain which of course everyone is interested in and then there's a mix stock size supply chain which basically has -- which actually has a different dynamic again. So if we talk about the magnet supply chain, the material we produce here at the LAMP is an oxide. The next step in the supply chain is metal making followed by alloy making. So the metal making creates an NdPr, basically metal, and then it goes to an alloy where you had the addition of iron and boron, and then it goes to magnet makers. And at present, most of what we sell is directly to magnet makers in the Japanese market. But we sell mostly actually in a metal form, and we toll manufacture that but we -- it's actually via either Vietnam or a small amount goes via Thailand. So it doesn't actually go via China to get to Japan. So no, we're not seeing that as a specific risk. Alloy makers for the Japanese market are in Japan.

[Operator]

Next question is from Robert Richardson from Clearview.

[Robert Richardson]

I noted in the report that, of course, I've only just read, product mix improvements including added -- adding separated NdPr and also with reference to lanthanum and cerium, are the separated NdPr running now or is that still coming?

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

No, they're not running yet. We will be at -- we're building those circuits at present. So we don't want to go into a huge amount of complexity. We used to have 2 trains in what we call SX 6 which did the cerium and lanthanum separation. In this quarter that's just passed, we moved those into the new SX 8 which is a much larger circuit. And then we're taking the -- what were the SX 6 vessels and repurposing those. So part of that we're making into SX 7, which is actually our final treatment phase for NdPr after it comes out of SX 5. And the other portion there is that we're adding additional separation stages to one of our NdPr trains, which allows us therefore to get the NdPr separation. So we're doing the engineering work on that. We would expect to be commissioning that in the second quarter of this financial year. And when we do that, there will be a volume effect because we need to fill those additional stages. And it will take -- we had an expectation that it will take probably some weeks for the circuit to equilibrate and be delivering on-spec material.

[Robert Richardson]

So still coming and hopefully later in this calendar year as I understood you just said. Can I ask one...

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

Absolutely. And can I just say it's -- the separated NdPr is important to us because it's not just that we get a small premium for it, so -- and separated Nd sells at about the same price as NdPr. Separated Pr sells at a slightly higher price. So on a consolidated basis, it's a bit higher. The greater value for it is really a share of wallet effect once again, particularly with our Japanese customers. So for example, we had 2 very large customers outside of China for cerium which is used in autocat, one's in Europe, one's in Japan. Now those customers are very, very pleased to be accessing cerium from us. They also use high purity Nd, high purity Pr and high purity lanthanum which we have not been able to supply. So that means that they still have a relationship with another supplier. What we want to be is that we want to be the prime supplier. I get into trouble when I say we want to be the wife not the girlfriend but anyway, and we can increase our share of wallet when we have a better -- when we have this new product range, and that is important in terms of setting up switching barriers to sort of -- to that business. So we are more likely -- the more products -- I mean, this is a very, very old rule of commerce that the more products that a customer has, the stickier they are.

[Robert Richardson]

Lastly, is there anything at all that you could tell us that might lead to settlement of this CondiSoil issue?

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

No, Robert. This is the stage I don't think it's helpful to have any sort of further discussion other than to state again that we are in compliance with all of our license conditions. We've implemented the IAEA recommendations, and we do have a full plan, which has been lodged with the relevant regulatory authorities with respect to the solid residue management.

[Operator]

Next question is from Trent Allen from Citigroup.

[Trent C. Allen, Vice President and Metals and Mining Analyst]

Just a very general and a quick question from me on the LAMP. Under your current operating license, how much product could you put out if you wanted to? So what's the actual measure there? Is it tonnes in or is it tailings out or is it rare earth amount? I'm guessing 2,600 tonnes a month NdPr, but how high could you go if you really wanted to test it?

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

Thanks, Trent. So well, it's -- there's a variety of different license conditions. Bear in mind that the 2 license -- the departments associated with the license is one which is the AELB, which is the Atomic Energy Licensing Board, and the other is the DOE. One of them, the regulation, relates to wet tonnes imported into Malaysia. The other one is in number of tonnes processed so we have to sort of balance that. The AELB license has a radiation management plan associated with it. The DOE has an environmental impact plan associated with it. So -- and each of those has different elements to it. So it's not a simple answer that I can give you to that because we have a variety of different license conditions associated with each of them. But to sustainably go to the 600 tonnes, we will need to be seeking new approvals under those conditions, and we will do that at the appropriate time. The other thing which is well worth noting is that, within those various license conditions, the most valuable thing still that we can do is to make every tonne that we import work as hard as possible, and that really is that recoveries. And that really is why we have spent as much money as we have done on Lynas NEXT because it means that we manage the material we're processing better.

[Trent C. Allen, Vice President and Metals and Mining Analyst]

Can we just add just a further question? How high can you go before you need to seek that change for the license? Is it 500 or 550 or is that too simple a way to think about it?

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

Unfortunately, it is too simple a way to think about it because it really -- that's what I'm saying, the operating mode, right, is terribly important because if we recover at 75% and we made a whole lot more tonnes and we're going to blow our license way before if we recover at, say, 85%. So our operations team spends a lot of time on optimizing the grade like if we're producing a concentrate grade at 34% compared to 32%, we're going to get a whole lot more as well. So it's not a question that I can simply answer, I'm sorry, Trent, except to say that we have an absolute clarity of focus on making every tonne work as hard as we possibly can.

[Operator]

Next question is from Graham [indiscernible] from Argus Capital.

[Unknown Analyst]

I just wanted to ask a couple of questions on demand and trying to understand what's happening there. Part of the ramp-up in demand in Japan, is that because they're getting less supply out of China as China is ramping up their electric vehicles?

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

No. It's actually increased usage. So there is a little which is about sort of growing our market share in the Japanese magnet makers. But every magnet maker in Japan has put on capacity in the last 12 months. So there is real demand growth. And I think that as we look at this, and when we meet with OEMs in the automotive sector all over the world, the Japanese OEMs are moving confidently forward with new technologies and particularly new technologies using rare earth because they are very confident about their supply.

[Unknown Analyst]

Yes, yes. Fair enough. The -- and some of the tonnes that you held back, would they have been going into China? I mean, you just said you didn't hold back anything in Japan.

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

Yes, yes. No, we held nothing back in Japan.

[Unknown Analyst]

But some of the stuff that was held back would've been material you were selling normally into China?

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

Yes.

[Unknown Analyst]

The -- and just in terms of the, I guess, the non-electric vehicle or vehicle demand in terms of wind. I guess it's always held out as a big sort of user of NdPr probably growing. There's seems to be a bit of a rebalancing on cost basis between solar and wind. Are you seeing anything in the discussions you're having with your downstream customers of an amelioration in the growth rates of wind or can you sort of give any more information on that?

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

We've got a very, very strong relationship with one of the very large suppliers of wind turbines. Demand is good. We've got a strong contract with them. So we're[Audio Gap]So using a wind turbine on our site. But no, we see that sector is still a very positive sector for us.

[Operator]

Next question is from Matthew Chen from Foster.

[Matthew Chen, Equities Research Analyst]

Just a couple of questions from me. How close are we to that 3,600 tonnes first look under the JARE facility? Just on the cash balance this might be [Audio Gap]I think I understand at this point are you still seeing that a slightly depressed market I guess running down the inventory, are you expecting that to reverse sometime soon and that leaves the price distortion on low transactions and volumes to correct as well? That's to that seasonality point which I think is raised earlier on. And then lastly, a quick one on TSF3 at Mount Weld. I know you campaigned on mine -- mined on a campaign basis anyway. So is there going to be any disruption to mix con coming out of Mount Weld into Kuantan as a result of the TSF3. How long are you expecting the effects to go for? When is that going to recommence precisely?

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

Okay. Firstly, I'm not going to tell you how close we are to the 3,600 tonnes. But let's put it this way, it is well within sight, well within sight.

[Matthew Chen, Equities Research Analyst]

Okay. Yes, and that's a debate you can have with JARE about modifying that, increasing that?

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

That would be right. Yes, the second thing is that in terms of the cash balance, you are right that we do have -- excluded from the cash sweep, we have -- at our election, we have materials -- we have monies that may have come in as a result of some sort of equity raise have been excluded. We made a choice that we wanted to make the USD 20 million payment. And so bearing in mind also that the 100 tonnes that we held onto is probably about $6 million. So if you wanted to add that back, you'd sort of get -- you'd be getting close to the sort of number you're talking.

[Matthew Chen, Equities Research Analyst]

Yes, that's pretty close. That's right.

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

Yes, yes. So we just made a choice. We wanted to get that headline, 150. We want to get that in good order, and it's always part of that ongoing relationship that we have with JARE.

[Matthew Chen, Equities Research Analyst]

So can you reverse that elections come December 31? Is that a bit of a moving feast? Or once you've made that election, it's set in stone?

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

Oh, no, no, no. With what we've got at present, sorry, Andrew would like to -- is going to answer that on my behalf.

[Andrew Arnold, General Counsel & Company Secretary]

Matt, you're quite right that exclusion for the proceeds from the warrant exercise is perpetual. And so it would be measured again at each interest payment date.

[Matthew Chen, Equities Research Analyst]

Okay. So it resets?

[Andrew Arnold, General Counsel & Company Secretary]

Yes, yes.

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

Yes, yes.

[Andrew Arnold, General Counsel & Company Secretary]

[indiscernible]

[Matthew Chen, Equities Research Analyst]

So you've got the room to go up to 49 come December 31?

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

Sure, sure. And if we get any more of the warrants exercise, we'll have the room to go up to more than that as well. That's...

[Matthew Chen, Equities Research Analyst]

Yes, and then 50% above the accumulated balance of 50%, isn't it? Yes?

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

Yes.

[Andrew Arnold, General Counsel & Company Secretary]

Yes. The detail is on Page 9 of the quarterly report.

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

Just right now, we don't have a better use of the funds than to pay down debt, right? If in the future we have a better use of the funds than to pay down debt, then we will do that. We don't need working capital significantly ahead of $40 million to run our business. And so therefore, we just made a choice that the best use of the funds is to pay down the debt.

[Matthew Chen, Equities Research Analyst]

Yes, okay.

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

Okay, so the China market. Look, I'm not sure that I would agree that the market in China is weak. I just think that it's -- some market in China are in -- the language used can sometimes be different from the reality and otherwise. So we still have, notwithstanding some of the decisions that we've made, we could sell virtually 100% of our production into our Chinese customers, if that's what we chose to do, right? So there's plenty of demand for our material in China as well as outside China. But our strategy, which we've been very clear about, is the engagement with our Japanese customers and then with rest of the world downstream customers. And that strategy is serving us well, and you can see it in our -- in the fact that our price is better compared to sort of the benchmark price. And we expect that we will continue to drive further improvement as we continue to execute that strategy. And then, the final point on TSF 3. So I was in Mount Weld earlier this week, and TSF 3, it's a giant, I have to say.

[Matthew Chen, Equities Research Analyst]

Okay, Pam's happy with it?

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

Pam is happy with it, yes. And so it will have -- we don't expect that it will have any effect. We plan just carefully moving that big equipment from mining across to do the earth works in TSF 3. And as soon as the earth works in TSF 3 are done, then we'll move back and finish off the mining campaign. So the guys there have it completely under control. So no, we're not expecting any disruption to supply.

[Operator]

Your next question comes from George Coleman from [ Arcos ].

[Unknown Analyst]

2 quick questions for me, please. I guess you've shared about as much as you can. So on environmental compliance in Malaysia, can you kind of help in any way to dimension the time frame from here? For example, have you met the new minister? Has that person kind of indicated over what time frame a review might occur? Can you give us any help at all on that issue, please?

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

George, not really. I think that, as with all of these things, stakeholder management is part of our day job and engaging effectively with our various stakeholders is something that we do. And generally speaking, is not aided by sort of public debate or discussion about it. So we are engaged with the relevant regulatory authorities, and we will continue to work on that basis. But I'll say again that we are lawful and transparent in everything we do. And there is, I guess, also important to note, probably everyone on this call and certainly us, we're all hypersensitive to any commentary about Lynas. I am exposed to Malaysian media every day. I think we've had, to my count, 3 mentions of Lynas since the election on the 9th of May. We get many more than that number of mentions a [ Rosemus ] handbags on a daily basis. So we're hypersensitive to the issue. But what we would see is a government which is being measured has many areas to review, and we would not appear to be at the very top of that list.

[Unknown Analyst]

Okay, great. And then if I may, just coming back to the inventory holdback, I'm just trying to better understand your kind of thinking there. It seems to me, as usual, a very simplistic level, but it's either a pretty strong signal on pricing or you're very worried about potential supply volatility which, again, I guess comes back to pricing. What other factors could be influencing your thinking there, please?

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

Look, I think the heart of it, it is really what you're saying. I think that we see a market with a bit of volatility in it. We also see a strongly growing market in Japan, and we want to be absolutely certain that we never run any one of our Japanese customers short on material. And so having a bit more in the pipeline is better than having a bit less. And yes, so really that's it. And I think as per Cathy's question right at the beginning, there is always a bit of seasonality towards sort of the probably our August to November period which has typically been a reasonably good thing for the business. But, I mean, running a business with 0 finished goods inventory, which is basically what we've done for 4 years with NdPr is not necessarily sort of the best setting to have it at. And given that we had such a strong cash conversion, particularly on NdPr sales, it's still our longest cash terms within 10 days, I think holding some inventory within our business then allows us to really make some optimized decisions. It's just the prudent thing for us to do.

[Operator]

Your next question is from [ Tim Ainsworth ].

[Unknown Analyst]

Just on the export cap that China's had set from 2016 at 44,000 tonnes per annum, I noticed last week, they reset the percentage of that cap from the 105,000 tonnes of official production to the new one of 147 -- at 47% down to 30%. To me, that confirms the 40% uplift in production with China firstly. But secondly, are customers aware of the capital on exports that's been in place, the objective that's been in place for some time for 2020?

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

So the first point, yes, we think that this is consistent with China government policy and that when you talked about that increase in mining quotas that, really, for us, is a case of sort of bringing just some of the technically illegal production under government oversight. It's not a reflection of there being a flood of new material coming to the market. The second thing, the sort of limitation on exported materials and how that feeds into the China 2025 strategy, I think that, that is increasingly being understood by customers. I think there are some markets where it is well understood, there are other markets where it's just really dawning on them. And so we talk to people, and we talk about -- Made in China 2025 is not a new strategy particularly in the rare earth market. China has executed excellently on their strategy to insource the rare earth supply chain over the past 20 years. And I think that there are many participants in the rare earths market that understand that, and it works very well in our favor.

[Unknown Analyst]

Okay. I'd just make a point to bring the over production in from the dark also brings the corresponding demand in from the dark which I imagine would pretty much net out. But just on the export quantity, we were 51,200 tonnes I think it was last year. So that 44,000 tonnes cap is a decent cut 18 months away to 2020? And I just thought customers would have been focusing on that a little bit more perhaps?

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

Some are. Certainly, some are.

[Unknown Analyst]

Yes.

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

But actually, the next biggest market for rare earths in the world is Japan. Japanese customers are confidently using rare earth materials because they're confident in their supply chain.

[Operator]

We've got one final question. It's a follow-up from Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

This will just be a quick one. CapEx to finish Project NEXT. What's the latest on that from this juncture from June 30?

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

So there'll be...

[Dylan Kelly, Research Analyst]

I can't ask a f*** question. I've just -- got one final question from someone.

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

Hello? Dylan, don't worry, we'll take you. Don't worry. And I understand that, that was a technical term so. And in terms of CapEx, we -- well, we've given an indication of CapEx in this coming quarter. And so the amount will be matched at about the same level in the final quarter of this calendar year. So that will bring us to -- we've really actually spent most -- we've commissioned and placed orders for an awful lot of what we're going to be doing at the LAMP. We still got some big ticket items, including the completion of TSF 3 at Mount Weld which is held within that NEXT envelope. But if you have a look at the -- sort of the part B, we've actually provided that forecast in there. Dylan, your turn.

[Dylan Kelly, Research Analyst]

Thanks, Amanda. It's probably gone for long enough now, so we can take it off line after the call.

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

Oh, no, go on. Ask your question.

[Dylan Kelly, Research Analyst]

Okay. So I just wanted to clarify some of your media comments recently. They appear to indicate that in the event of a trade war, somehow Lynas would be negatively impacted. This has got to be a misquote, doesn't it? Can you just clarify that? I'm referring to the New York Times article from 2 weeks ago.

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

Yes. So thanks for that, Dylan. Firstly, we just like to say that we didn't seek the opportunity to make comments about tariffs. And for example, the New York Times reporter, the visit here was about 2 months in the making. Originally, she'd wanted to come sort of just before the election, and given timing and my own travel schedule, it didn't really work. So -- but she did in fact visit here well ahead of there being any sort of consideration of tariffs being applied to rare earths. So the conversation that we actually had in that instance was more in the context of what happened in 2011. But clearly, sort of New York Times having the article there ready to go, and then with the tariff sort of publicity, it seemed to make sense. But no, I was accurately quoted to the extent that, like most economists in the world, I actually do think that open and undistorted markets ultimately serve the markets and the consumers in those markets best. Having said that, any[Audio Gap]More likely to have a positive than a negative effect because of our market positioning. And I see us being in a very strong position as the only non-Chinese supplier. Okay? Hello?

[Operator]

It looks like we've got no further questions at this time.

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

Okay. Well, once again, thank you all for participating in the call. And we look forward to speaking with you again next when we do the annual result.

[Operator]

Great, thank you so much. Ladies and gentlemen, you may all disconnect.