Lynas Rare Earths Ltd

ASX:LYC

Earnings Call Analysis

Lynas faces challenges but stays positive

In the past quarter, Lynas accomplished significant milestones such as the first shipment from its Kalgoorlie plant and the separation of new materials in Malaysia. Despite rare earth prices hitting five-year lows, Lynas generated positive operating cash flow, reflecting strong cost control. Production volumes dropped but met market demand. Lynas emphasized efficiency and automation improvements while completing major projects. Ongoing concerns include managing Malaysian plant maintenance and adapting production plans according to market conditions. The company remains focused on long-term growth and profitability despite current market challenges.

Strong Operational Momentum Amid Market Challenges

Lynas Rare Earths showcased its resilience and strategic discipline during the quarter ending June 30, 2024. A notable milestone was the first shipment of Mixed Rare Earth Carbonate from the newly constructed plant in Kalgoorlie. CEO Amanda Lacaze highlighted the company's persistent efforts to enhance efficiency and reduce costs amidst low market prices for NdPr, rare earth elements crucial for high-tech applications. Despite these challenges, Lynas has maintained positive operating cash flows, underscoring its operational robustness even at the current five-year low price levels.

Capital Investments and Future Capacity

Lynas is in the midst of significant capital projects, affecting its free cash flow, which remains negative post-CapEx. However, the company is strategically positioning itself for future market opportunities. The expansion projects in Kalgoorlie and the upcoming work in Malaysia are set to boost production capacity and introduce new revenue streams via initiatives like the DyTb separation circuit. These advanced circuits will improve safety through automation and enhance profitability by increasing efficiency and production capacity.

Production and Market Alignment

During the quarter, production volumes decreased but remained in line with market demand. The company successfully met all customer requirements, slightly reducing its inventory from the previous quarter. A mechanical failure at the Malaysian facility was a minor setback, but Lynas is using this opportunity to implement additional upgrades consistent with the plant's age. These updates, along with the added capacity from Kalgoorlie, will be discussed further in the annual results due at the end of August.

Strategic Partnerships and Operational Enhancements

The quarter also saw the successful onboarding of Carey Mining, Australia's first Aboriginal-owned mining business, to the Lynas site. This partnership brings new equipment and is expected to foster a productive long-term relationship. Additionally, the commissioning of new circuits in Malaysia will allow Lynas to separate high-demand materials like dysprosium and terbium more efficiently, catering to the needs of high-performance magnet manufacturers. This operational enhancement strengthens Lynas’s ability to continuously improve its processing capabilities and expand its product portfolio.

Future Production Guidance

Lynas maintains a cautious approach to future production targets, focusing on aligning output with market conditions. CEO Amanda Lacaze emphasized the company's strategy not to flood the market but to optimize production based on demand signals, particularly from China. The company aims to demonstrate its ability to meet the Lynas 2025 targets while adapting to market dynamics, highlighting a flexible yet strategic approach to scaling operations.

Technological and Environmental Advances

Lynas continues to innovate with the introduction of new automation technologies, such as 'rotainers' for bulk handling at Mt Weld, significantly reducing manual labor and enhancing operational efficiency. Environmental considerations are also at the forefront, with the signing of contracts to build a gas-fired hybrid renewable power station at Mt Weld. These advancements align with Lynas's commitment to ESG goals, ensuring sustainable growth and operational excellence.

Market Adaptability and Strategy

Despite the volatile market environment, Lynas has adopted a strategy that includes holding inventory rather than selling at low spot prices. This approach is supported by a diverse portfolio of pricing constructs, including fixed-price contracts and agreements pegged to market prices. This flexibility allows Lynas to optimize revenue while meeting varying customer needs. The company also remains engaged with emerging markets and regulatory developments, particularly in the EU, to capitalize on new opportunities.

Continuous Improvement and Cost Competitiveness

As Lynas approaches the end of its heavy capital investment phase, the focus is shifting towards pushing down operating costs. Key areas include improving recovery rates and optimizing logistics. The planned updates at the Malaysian facility and the ramp-up of Kalgoorlie operations are central to these efforts. The company has made clear that maintaining a competitive cost base is critical, especially in light of the higher operating expenses associated with new facilities in Australia compared to Southeast Asia.

Earnings Call Transcript 2024-Q4

[Operator]

Good day, and thank you for standing by. Welcome to Lynas Quarterly Results Briefing Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Lynas Rare Earths. Please go ahead.

[Unknown Executive]

Good morning, and welcome to the Lynas Rare Earths Investor Briefing for the quarter ending 30 June 2024. Today's briefing will be presented by Amanda Lacaze, CEO and the Managing Director; and joining Amanda today are Gaudenz Sturzenegger, CFO; Daniel Havas, VP, Strategy and Investor Relations; and Sarah Leonard, General Counsel and Company Secretary.

I'll now hand over to Amanda. Please go ahead, Amanda.

[Amanda Lacaze, executive]

Good morning, everybody. I see we have plenty of people on the call, which is always a delight. During the quarter, the first shipment of Mixed Rare Earth Carbonate left Kalgoorlie. After the incredible challenge of constructing that plant, on the previously very constrained time lines, this was certainly a milestone to be celebrated. But frankly, we were all just a bit too busy to spend much time celebrating.

I think that the quarter could best be described as one where our internal focus remains firmly on improving efficiencies, reducing costs and continually challenging ourselves to find new ways to improve and flourish in a tough market. And, of course, to continue to deliver on our growth projects, which will deliver extra capacity, but will also importantly, deliver greater efficiencies, improve safety via new automation processes and new revenue and margin via initiatives like our new DyTb separation circuit in Malaysia.

I think everyone on the call knows the price of NdPr is stubbornly sticking at 5-year lows. We all knew it would come off at very highest highs, but these lows really reflect continued slow conditions in the Chinese economy, and we watch with interest as we see the various economic initiatives being taken there.

But despite those low prices, we're pleased to continue to report positive operating cash flow. That reflects our ongoing commitment to continuously improving our cost competitiveness. And we are confident that alongside Northern Rare Earth, we're the only two firms that can be profitable at these price levels.

Free cash flow, as pointed out by some keen observers, I was reading one of your reports yesterday, that is after CapEx is negative, but that's not surprising given the large capital projects that we are still completing. And that is our choice as we continue to prepare for future market growth. However, as also identified by certain [indiscernible] observers, we are not accelerating the Kalgoorlie ramp-up as we may have done under different market conditions.

During the quarter, production volumes were down, but actually well aligned to the market, and we continue to meet all customer needs from that production and a slight reduction in the inventory that we held at the end of the previous quarter. So bearing failure in Malaysia was not forecasted, but really on reflection was not completely unexpected as one of our people noted. He had been working for over 10 years, God rest his soul.

With the extra capacity coming online at Kalgoorlie, we now have the opportunity to plan some additional work at Malaysia, which is consistent with the age of the plant, and we will provide some further updates on that when we deliver the annual results at the end of August.

And some other exciting news, which is canvassed in the report. We now have Carey Mining on site. Carey Mining is the first aboriginal-owned business in Australia. Daniel originally set this up about -- Daniel set this up about 30 years ago. It's very exciting to have them involved Daniel as part. Grew up in the Laverton area and has a strong connection to country.

They bring with them new kit, which is really quite exciting to see on site. And the deployment of people and equipment to site has gone very smoothly, and we look forward to a long and productive relationship with Carey.

During the quarter, we also announced the very efficient implementation of a new circuit in Malaysia to separate our dysprosium and terbium. These are materials, which are required in high-performance magnets and we have the great benefit of course, now in Malaysia, of being able to continuously improve and enhance the operations at that plant now that we have sort of confidence about our ongoing presence.

And then, of course, we had and we've included at least one picture, I think the energization of Stage 1 of the Mt Weld expansion and great progress on Phase 2. It's very -- many of you who have visited -- well coming to visit now you will see that the site really looks very different from what it's looked like over the past decade as we complete this really significant expansion.

Work on that project is proceeding very well, and we're really pleased with the fact that Stage 1 will be fully commissioned and tied in with current operations over the next few months, which will allow us to progressively increase Mt Weld output as we debottleneck the dewatering stage.

And then, of course, Kalgoorlie, and I'm sure some of you will be at Diggers and Dealers in a couple of weeks. And I know that you will be very impressed by this facility. I was there a couple of weeks ago, and it really -- it is a thing of beauty to see a brand new sparkling plant. It's even better to know that it is operating as designed.

And we've got a number of initiatives there, which really goes to this point about efficiency and automation. We mentioned one of them in here, which is use of what we call rotainers, which are basically bulk in containers, which we fill at Mt Weld. So we don't need to have the manual labor to fill the bag, which then are fully automated, operated by someone with what really looks a bit like a Nintendo game console to lift that container and tip it into the hopper and then bring it back down. So all really very exciting.

We are approaching the end of our very heavy capital investment phase with Mt Weld expected to complete this year. The land industrial plan, the continued enhancement of our facilities in Malaysia are on track and the Kalgoorlie ramp-up proceeding.

We will continue to focus on pushing operating costs down. Key areas of focus in that include clearly, everybody here, even though it's a little bit about mining, we'll know that recoveries equal margin. We have significantly lifted recoveries at each of Mt Weld and Lynas Malaysia. And as we bring on our new particularly at Mt Weld, our new facilities. We will be able to improve that further as we're bringing our fine grinding circuit.

Last night, you would have seen that we released an announcement with respect to signing contracts with Zenith as a builder and operator of gas firmed hybrid renewable power station at Mt Weld. And that has always been part of that program is to identify ways that we can as we increase our energy consumption, do it in a way that is consistent with our ESG objectives.

So all in all, a fairly in some ways, an eventful quarter, very much focused on ensuring that we continue to improve our business so that we -- remembering that our business is not about what we produce, but it's about how much money we make. And so really, we are managing all of our activities at present to ensure that we maximize margins and profitability in what continues to be a very challenging market.

And with that, I am happy to take questions.

[Operator]

[Operator Instructions] Our first question comes from Chen Jiang of Bank of America.

[Chen Jiang, analyst]

Three questions from me, please. So Kalgoorlie heavy additional heavy rares capacity from Malaysia. I'm just wondering how should we think of the total heavy earths you can produce from Mt Weld, which won't change. Does that mean the heavy rare earth you are going to produce from U.S. going to be reduced? How should we think about the pace stock?

[Amanda Lacaze, executive]

Thanks, Chen. So at this stage, we are considering feeding both facilities with material from Mt Weld, but we are also discussing with the various different projects, which are focused on producing materials, which have Heavy Rare Earth in them about potential future supply.

As you know, there are many projects. There's relatively little production outside of Southeast Asia at this stage with the exception of one in South America. But we are actively engaged. We certainly would like to see additional material come into the market. But if not, we will see from our Mt Weld deposit.

[Chen Jiang, analyst]

Right. Just a follow-up, Amanda. Do you have to change your Mt Weld mining plan in order to do that?

[Amanda Lacaze, executive]

We will -- and I think I've flagged this previously. I think that over the past decade, we've primarily mined as mine as well for grade. However, with the additional drilling that we've done, particularly over the last couple of years, we have a much better understanding of our ore body by element as well as by grade. And so we do have the opportunity to become much more sophisticated in our mining plan and to mine by element as well. So that will allow us to really look at ways to optimize the amount of heavies within our mining program.

The other thing is that over the last number of years, as we talk about recoveries, our absolute laser focus has been on NdPr recoveries. The current process does not work as efficiently for our heavies and we're doing a lot of metallurgical test work at present to increase the proportion of heavies, particularly the DyTb that we've recovered through the process. And it's highly prospective, and we're pretty confident about being able to improve recovery rates as well.

So together, the optimizing the mine plan and improving the recovery rates will give us a much better profile in terms of feedstock.

[Chen Jiang, analyst]

Sure, sure. Maybe last question. On the sulfuric acid from BHP's nickel waste closure. I understand that BHP will continue to supply the sulfuric acid by importing from the stable market. I'm just wondering who's going to bear the cost of importing? Is that BHP or Lynas until 2027? And what's the plan after 2027?

[Amanda Lacaze, executive]

Okay. So we are actively engaged in discussions with BHP at present. As you would appreciate some of those are actually commercial and confidence. We will provide a further update. Suffice to say that in -- as we indicated, BHP -- we have a contract with BHP. It is a contract, which requires our best efforts to continue to suppliers -- right from the beginning.

It's always conceived if there been times where imported acid would be required alongside that produce from the smelter because, of course, there were major maintenance shuts, which were going to occur at the smelter in any case. And I think we have the direct relationship with BHP.

I think also that most people would be alert to the fact that we are not the only sulfuric user in WA or indeed the only sulfuric acid customer is BHP. And so there are industry initiatives looking at how does the logistics chain, get rebuilt so that it works for inbound not just outbound sulfur asset management.

So look, we're working on it, Chen. It's not as easy as sulfuric in Malaysia, which is literally over the back fence. But we are confident that we can find a pathway through.

[Chen Jiang, analyst]

Sure, sure. I have more questions, but I will be passing now. I'll get back to the line later.

[Operator]

Our next question comes from Austin Yun of Macquarie.

[Austin Yun, analyst]

Two questions from me, please. The first one is on the downstream production in Malaysia. I understand that one of the kilns was offline for 1 month. I just kind of understand how should we think about the production ramp-up and the production profile for the next 6 months? Come back with the second one.

[Amanda Lacaze, executive]

Okay. So Austin, as I just indicated, it's a timely reminder of the fact that we are properly in the period when we had the challenges on the license, fully depreciated the cracking and leaching plant in Malaysia and operated R&M on the basis of recognizing that it might be a time-bound facility.

It is now time for us to reconsider what needs to be done there for a plant, which is a decade old in, I think most people would say, fairly sort of the environment. It's a hot and humid environment. The facility itself is sort of quite challenging. And so we are -- our maintenance team is really assessing all of these items.

Actually, a bearing value is not something that they can easily predict but looking at how do we make sure that we do all of the work, which is necessary to set this facility up for the next 10 years is the key task of our team in Malaysia at present.

I will give you a further update on that when we announce our annual results at the end of August. But we certainly -- this is the area now that we've got Kalgoorlie online, that we do have some headroom in terms of capacity. So we will make our plan to optimize production and to align it to market conditions.

[Austin Yun, analyst]

Okay. Just want to clarify, to make sure that my -- I understand it properly. So are you expecting to do a more major maintenance at the [indiscernible] simulation, so which means lower production rate and higher CapEx for the next 6 months in Malaysia, while the production shortfall could be met by the Kalgoorlie ramp-up. Is that the right way to understand it?

[Amanda Lacaze, executive]

No, I don't -- almost. But the first thing is that we have a -- and we've already indicated to the market. And what we call the LAMP industrial plan, which is about optimizing, improving, maintaining, et cetera, the LAMP facility. And so any capital will be covered within that envelope. So you don't need to be putting in additional capital into your plan.

The way that -- I mean, none of it is sort of like tomorrow urgent. It just is work that needs to be done, and we have the opportunity now to be able to schedule accordingly. And once again, because the market is muted, let's say, that's a nice word. We certainly have the opportunity to make sure that we plan in a way that is aligned with the market rather than just pumping out as much NdPr as we possibly can.

[Austin Yun, analyst]

Okay. My second question is around the Sojitz asset. Just trying to understand the asset usage intensity, like for one time of concentrate processed, would the consumption be around 1.5 to 2 tonnes of acid? Is that the right way to think about how much acid you need? And also, do you have any plans to build your own sulphuric acid plant beyond the medium term?

[Amanda Lacaze, executive]

So we don't actually disclose how much asset we use. It is a significant input into the process. Do we build our own sulfuric acid plant? Very expensive. Maybe as the government was keen to give us some money, maybe we might think about doing it. But it is certainly part of the assessments of potential options for ongoing supply and was always part of our thinking, which is one of the reasons why we set the initial contract to get us through early stage commissioning and operation and gave us the opportunity to really look at a variety of other solutions for that sulfuric acid requirement.

So yes, look, that's all I can tell you at this stage. We will provide further updates as we move through this process.

[Operator]

Our next question comes from Paul Young of Goldman Sachs.

[Paul Young, analyst]

Amanda, a few questions on the market. Pretty strong, I think of you coming through that you're only going to ramp up as demand in the market improves, which I think is sensible. But just a few questions around your inventory NdPr inventory. I think you had 500 tonnes at the end of the March quarter. Did you continue to build inventory in the June quarter?

And also to build in inventory, that decision, was that a voluntary decision? Or are you actually getting some pushback from some of your customers saying they can't take the volume?

[Amanda Lacaze, executive]

No, no, no. We deliberately built the inventory because -- we have customers. We have demand for anything that we produce. Some of that is from customers who are inside China. But we have a very deliberate strategy to not sell into the spot market.

And we also have a very deliberate strategy to not be selling materials that others may put into inventory and hold for when the price improves. I mean, when we can actually afford to carry that inventory ourselves.

For some of this, we can remember selling NdPr at $29 a kilo in 2016. I think that Paul and I both have this tepid on our borrowers. At that stage, we didn't have the option because we were on a nice edge in terms of cash flow. Today, we have the option to choose to hold the inventory until the price improves. We did actually reduce the inventory by a couple of hundred tonnes during this quarter.

[Paul Young, analyst]

Okay. That's good to know. And then, Amanda, just on future offtake expansion. You've had this question a few times. I mean, there's still quite a few emerging rare earth companies who are stating that they believe they can sign higher fixed price contracts in the order of $100 a kilo with emerging magnet producers -- existing magnet producers. And so -- and we know -- and you stated that no one is making money at $50, $60 a kilo, and we know that nothing really works as far as the high-quality projects unless you do have an $80 a kilo long-run price.

So the question I have, though, is that do you have the ability to actually -- and the flex to actually potentially go side fixed price contracts, higher fixed price contracts with non-Japanese magnet producers, i.e., Germany, in Germany, in Korea, in the U.S.? Do you have that ability to go and sell fixed price contracts to the non-Japanese magnet industry?

[Amanda Lacaze, executive]

Sure. Absolutely. And I comment on other people's assertions except to say that we actually run a business not a spreadsheet. And so we have contracts with European customers, and we have some of those, which are -- I know people sort of talk about the new pricing models. We have some, which are fixed price. We have some which are floor ceiling and we have some which are sort of pegged to the published market price.

We've always thought that the best way for us to be able to optimize pricing was to have a portfolio of pricing constructs, and we continue to have that today. The only thing that I could tell you is that we do engage with all sort of both magnet makers and magnet buyers, sort of the large magnet buyers. I have yet anyone to say to me, I'd be delighted to sign a fixed price contract at $80 a kilo. I mean I could assure you that we would have that signed sealed and delivered within ours.

So I think that recognizing that as the market changes over time, so to the customers' expectations and part of the art of selling is to understand the right time to strike those relevant contracts. There are things that I think will improve some of the buyer activity including the most recent critical minerals regulations, which are being brought in by the EU.

And I think that, that does provide further opportunities for us to engage effectively in that market. But I think that anyone who thinks that we just make stuff and then whoever feels like buying it for whatever price they feel like buying it that we sell it to them doesn't truly understand the level of focus and the attention this gets in our business.

And I think that you can see quite clearly in the results that we consistently deliver better outcomes than just the published market price would suggest, which reflects the fact that we don't just sell spot -- at spot price to whoever happens to ring up that day.

[Paul Young, analyst]

Understood. Just last one, just on the numbers, maybe bringing Gaudenz into it. Just on Kalgoorlie and the cost there. Are you still capitalizing or is it included in the $131 million in CapEx or actually expensing within the $84 million in the quarter of OpEx?

[Amanda Lacaze, executive]

We are still capitalizing. We expect to reach a stage where we would meet the accounting requirements that would allow us to then move it off the capital account linked to operating expenses.

[Operator]

Our next question comes from Daniel Morgan of Barrenjoey.

[Daniel Morgan, analyst]

So I understand the ramp-up of your business is subject to market conditions, which absolutely makes sense. Should I expect that production should be at about a 7,000 tonne per annum run rate until the market improves? Is that about right?

[Amanda Lacaze, executive]

So I think that's an excellent question, Daniel. You will have noted that we rarely give detailed guidance on production, and it's not my intention to do so today. Having said that, we are absolutely alert to sort of the various statements that we've made over time, particularly with respect to Lynas 2025. And we feel that it is important in this coming financial year that we demonstrate our ability to be able to produce at those sorts of rates. But we will make a choice on when we do that according to market conditions.

[Daniel Morgan, analyst]

Okay. Should we expect at the...

[Amanda Lacaze, executive]

Sorry, Daniel, I won't be [indiscernible] of that. You should expect that we are not going to start -- well, we have not started the year and said, okay, let's go for 10,500 tonnes this financial year. Clearly, it would not be a sensible thing for us to do with the market the way that it is at present. But we are keeping a close watching brief on inventory levels within China.

There has been some destocking. And as we see more of that occur, we will make decisions about how we dial up or dial down our production.

[Daniel Morgan, analyst]

Okay. That's sensible, of course. On China, what do you make of the latest China government policies on the industry there? And what does greater control there or consolidation there mean for your business? However you want to answer that question.

[Amanda Lacaze, executive]

Generally speaking, when the China central government exercises more rather than less control, the market does appear to operate more functionally. And so that sort of seems at odds with an underlying belief in sort of free market activity. But there are many dynamics in the Chinese market, many more than just what the central government does, is what state governments do, that sort of you still have some independent producers, particularly of -- a lot of independent producers of magnets.

So you can have a variety of different dynamics. All sort of not necessarily going in the same direction. And we saw this in '15 and '16 with the sort of really significant production of illegally produced, i.e. not licensed materials. And when the government stepped in and really took control of that was when you started to see the market function more rationally.

So on balance, is it a good thing for the Chinese government? Given the Chinese environment and ecosystem, we would see it is probably more likely to be positive than negative. But it's difficult to forecast what will ever happen inside China.

Suffice to say that the Chinese industry is -- other than as I said earlier, our assessment is Northern Rare Earth and Lynas are able to continue to be profitable because of our low operating costs. And I think that there is a recognition that the -- always has been in China that the industry is important for China's economic success, and we'll continue to take actions to improve it.

[Daniel Morgan, analyst]

Just last question, has MREC and -- I mean Kalgoorlie sourced MREC? Has that made it through the back end of the Malaysian plant as of yet? Or is that still to come?

[Amanda Lacaze, executive]

Not yet, but it's on site, it's unloaded, it's -- we're sort of working on the basis of -- we just have to manage how we batch it through in the first instance so that we've got the opportunity to really assess it. But we've got nothing at this stage, which makes us any more nervous than you ever are when you start a new process.

[Operator]

Our next question comes from Dim Ariyasinghe from UBS.

[Dim Ariyasinghe, analyst]

First question for me. Just on the heavy rare announcement that you made a while back. Is there anything you can do, say to help us quantify that -- the revenue uplift and give you some value for it? That's my first question.

[Amanda Lacaze, executive]

We -- not really.

[Dim Ariyasinghe, analyst]

Maybe I'll ask it differently. I think I know the answer, but I guess, why now? Maybe I'm missing something. I think I know the answer, but this is an option that was available to you years ago? Or is this something that you're doing now because of where the market and you're just trying to optimize, I guess?

[Amanda Lacaze, executive]

Okay. All right. So the answer on that. Look, first up, we will get our margin uplift from separating Dy and Tb, right? And it will -- bearing in mind that there's still relatively small volumes. I don't want to sort of overstate it, but the benefit to us from being able to separate our own DyTb is that we are able to then offer magnet makers and other higher -- there are some higher-value sectors that utilize those materials. We are able to offer those materials either as a package with our NdPr to magnet makers or otherwise.

So it is about enhancing the product range as well as improving the margin that we are able to generate from that material. Bearing in mind that these days, and I know that there's lots and lots and lots of discussion about DyTb prices alongside all of the years or 10 years ago, you typically used about one to -- call it was even higher than that previously and high-performance magnets, a ratio of about 1 to 10 HRE to NdPr, DyTb to NdPr.

That's actually dropped back to about 1 to 14 these days. A lot of focus from magnets makers and magnet users on ways to continuously improve their magnet and their magnet coercivity. So magnetic properties above 100 degrees. So -- but it remains an interesting market. And for us, the ability to generate full value from the materials within the Mt Weld ore body is and always has been key to our strategy.

Why didn't we do it earlier? Well, for a variety of reasons. When we first looked at this on my watch anyway, we didn't do it because we didn't have any money. Then as we move through, we then sort of hit 2018 with some of the challenges with the license situation in Malaysia. You guys would have hand me if we sort of talked about making any sort of significant investment in Malaysia with that hanging over us.

We have clarity on the path forward in Malaysia. It's by far the most efficient way for us to enhance production, and so that's what we're doing. Is that the answer you looked in?

[Dim Ariyasinghe, analyst]

Maybe I can try a little bit more. It needs to go into a cell. So if I assume a 40% discount to, said to Heavy Rare Earths, is that narrowed to 20%. I guess it's maybe too early to figure that out. But...

[Amanda Lacaze, executive]

I don't have the number off the top of my head, Dim, sorry, but I'm sure that Daniel and Gaudenz will be happy to have a bit more discussion with you to give you a bit more on that off the call.

[Daniel Morgan, analyst]

Yes. Yes. Cool. And then maybe another question, just helping quantify sulfuric acid issue, I guess first thing is I don't expect there to be any issue? Or do you expect any issues for sulfuric acid or the availability impeding to ramp up? And again, rough numbers, I know it's -- you can't give us tonnes or you said but is there a pie chart of 20% of your costs now? Just for us to assess how material, which is your cost base, I guess, going forward?

[Amanda Lacaze, executive]

Yes. Okay. So it won't impede the ramp-up whilst they sort of ramp down at the smelter is relatively short term. There will be plenty of sulfuric still sitting in that tank for a while afterwards. We have enough headroom to be able to manage this transition. So we're good with that.

And in terms of financial effect, there are -- we won't know that until we've actually resolved some of the logistics. So I'm sorry that you just have to be a little bit more patient on that.

Kalgoorlie, I think everybody knows that to operate facilities in Australia is more expensive than to operate them in Southeast Asia. And so we continue to work on ways to optimize our cost base. And a fair bit of that is associated with logistics, and we have some good plans to continue to improve that as we move forward.

We do need the Kalgoorlie facility to be more efficient in terms of costs, and it is really at the top of our list. So having got the plant working now, a lot of our focus switches to improving cost competitiveness. And sulfuric will simply just be one of those elements.

[Dim Ariyasinghe, analyst]

Cool. And just one last quick question. Just on [indiscernible] and the others tried to get the best on the ramp-up. Just in particular with Mt Weld expansion. Is that on time versus, I guess, your original guidance or Stage 2 a little bit behind schedule from IRE? Is that...

[Amanda Lacaze, executive]

It's a little bit. But the actual project is going really well. We did have to do some additional surveys as part of environmental approvals earlier this year. Once again, it's all about the market. If the market was strong, then we would put our foot back on the accelerator all the way down to the floor, but it's not necessary to do that right now and speed always has some sort of costs associated with it.

We think that the program as it stands, works very well for us in terms of aligning to the market. As I said, it's really important to note, our current bottleneck at Mt Weld is the dewatering circuit. The Stage 1 of the expansion is the dewatering circuit. So it allows us to release that bottleneck.

It also replaces an area where we've always had challenges in terms of safe performance and it automates that and takes human bodies out of the operation of our filter circuits. And so that will actually give us an interim step up. And that interim step up, we think will be sufficient for this financial year, which is the reason why we are now looking to complete by the end of the financial year rather than I think 3 years ago, we were originally targeting sort of the end of the calendar year. But we don't see this as being anything other than properly aligned to our general business plans.

[Operator]

Next question, we have from Milan Tomig from JPMorgan.

[Unknown Analyst]

Yes. Just a question. The reconfiguration of the Malaysian solvent extraction circuit to produce heavies, I think you mentioned that, that was going to take some NdPr oxide solvent extraction out. I was just interested in that ratio. If I can put it another way, if you get to 1,500 tonnes of heavies, does that take out 1,500 tonnes of NdPr oxide production? Or if you could just provide some color on that ratio, that would be great.

[Amanda Lacaze, executive]

Alan, sorry, that is maybe a little bit misleading the way that that's been a I'll just check on how we've stated it because the intention is not to indicate that we have any reduction. In fact, we are increasing our NdPr production rates at Lynas Malaysia. So currently, the circuits are configured to produce -- sorry, up until now, the last 6 months, circuits were configured to produce about 7,000.

We have done the work on two of our trains to take that up to about 9,000. And we will at the right time to do the additional work to take that up to 10,500 and potentially even 12,000 tonnes of NdPr. The -- as part of that, we put in some new circuits in our new [indiscernible] receivable area. And so that has freed up some of the circuits that were previously used for NdPr separation, and those are the ones that we're now repurposing for HRE. So the introduction of the HRE, certain separation does not have any effect on our plans for the ramp-up of NdPr capacity.

[Unknown Analyst]

Great. And just another one on the heavy strategy. The U.S. latest update from August last year, I know you indicated an operational target time frame of FY '26. That recent update on the Quantities heavies strategy, I think you mentioned that you have production starting their midway through calendar year '25. Are you able to just step us through the latest thoughts on sequencing of these 2 projects?

[Amanda Lacaze, executive]

So the -- of course, we can do it much faster in Malaysia because we have a brownfield site. And as I said, we're repurposing those particular circuits. It's also exclusively DyTb and better hole BM separation is a more complex facility that we're talking about in the U.S. And we are continuing to progress with all of those preconstruction activities including sort of the design, the review, we're working with our U.S. government partners on that. In the meantime, the sooner we get the DyTb out of Malaysia, the better for everyone.

[Operator]

Next, we have Matt Hope from Ord Minnett.

[Matthew Hope, analyst]

Just back on to Malaysia and Kalgoorlie. Just first, with sorry, is. Well, first, are you still planning to send the Heavy Rare Earth residues from Malaysia to Texas. Because as you noted, there's really no third-party MREC likely to be available from North America still 2028 at best. And it's just puzzling it to see how you could produce 3,000 to 3,000 to 5,000 of heavies from Mt Weld or alone without those heavy residues?

[Amanda Lacaze, executive]

So I'm not sure what you mean when you say the heavy residues. We produce SEG, which is a heavy rare earth compound in Malaysia, we do expect that.

[Matthew Hope, analyst]

That's what was we referring to.

[Amanda Lacaze, executive]

Yes, yes. So we will use some of that as feedstock in the U.S. And we will -- the current plan is also to feed the U.S. with the Mixed Rare Earth Carbonate from Kalgoorlie. And once again, that will simply be optimized at the time according to demand. Bearing in mind that as said, demand varies over time. And I think this is one of the things, which is really important.

Once again, I go back to we run a business. We don't run a production plant and understanding what the market needs, when it needs it and when. And the fact that we produce materials, which are used in technology applications, and that varies over time. So we see demand for DyTb going certainly [ a little ] into the future. U.S. government sees the importance of that, which is why they're supporting the development of that plant. We are fortunate that we have heavies in our deposits, but we are very happy to complement that with heavies from other sources as they come online.

[Matthew Hope, analyst]

Okay. And so there's no requirement for the government to produce a certain production level given they're funding it?

[Amanda Lacaze, executive]

No.

[Matthew Hope, analyst]

All right. Okay. And the second question was just I was wondering about whether there's been any evolution on your plans for Kalgoorlie about how to manage that high capacity over the longer term. And do you know yet whether production can be flexed downwards and remain cost competitive?

[Amanda Lacaze, executive]

So yes, very good questions. I'm presently really focused on getting it to target rates. It's our initial target to get to nameplate no. Our initial target is to, get to an interim production level that we see is consistent with the market and allows us to be cost competitive.

But as I indicated before, as we ramp the facility up, we now are starting to switch focus into what can we do to improve efficiencies in that facility. And ensure that it doesn't carry a cost penalty compared to the material that we take through in Malaysia. That will take some time, but is very much sort of our focus as we get the facility operating.

Well, we're just about on the hour, Maggie. So I think unless we've got anybody else in the queue we probably...

[Operator]

We have three more questions. Would you like to...

[Amanda Lacaze, executive]

Sure, sure. Okay. I can't see the questions, yes. So that is fine.

[Operator]

Our next question comes from Shannon Sinha from Morgan Stanley.

[Shannon Sinha, analyst]

Again towards the end, most of the questions have been answered. But I thought I'd ask around the Mt Weld CapEx just given that we saw the increase at Kalgoorlie CapEx last quarter. How that's running? Are you still confident in that CapEx budget?

[Amanda Lacaze, executive]

Yes. If we would have disclosed it, Shannon. So it's running very well.

[Shannon Sinha, analyst]

Okay. And I just had another question around the hybrid renewable energy at Mt Weld. I was wondering, it's obviously good from an ESG standpoint. Was there any impact to costs from that at all? Or is that pretty much in line with what they are currently?

[Amanda Lacaze, executive]

So as part of the Morwell expansion, we increased our energy draw by about I'm not going to say the number because -- but significantly, right? So if we take that, and we indicated this in the announcements, we take that and we assume that, that is served by a diesel power plant compared to being served by the solution that we've got, the cost per kilowatt hour is significantly reduced.

So compared to delays energy draw, the cost is higher because today's energy draw is much lower. But bear in mind, the Mt Weld expansion process is 4 times as much material. And we also have quite energy hungry fine grinding circuit, which allows us to reprocess some of the material, which we've currently gotten the tailings and then allows us to improve recoveries. And so this is a very cost-effective solution for that increased power requirement in the future.

[Operator]

Next, we have David Deckelbaum from TD Cowen.

[David Deckelbaum, analyst]

I wanted to ask just one more on the Heavy Rare Earths. Should we view this as a strategic attempt to perhaps open more commercial avenues for your business with new customers in new areas? Or is this perhaps just taking more control over your product over time so that you would have future optionality? And I'm trying to get a sense of how imminent maybe this commercial opportunity would be.

[Amanda Lacaze, executive]

There are many sectors that we don't participate in that presence because we don't have separated DyTb. And then, of course, there are existing customers, which is in the making of magnets. And so some of the new sectors, which includes in the electronics market, are very attractive to us, and it gives us an opportunity to expand into those areas. And then, of course, as I said, for our existing magnifying customers being able to offer them sort of a package of NdPr and DyTb is potentially of significant value as well.

[David Deckelbaum, analyst]

Appreciate that. And just a little bit on the details. Just curious with the grant money that was received this quarter. Was that specific Australia projects from the Australian government? Or is that how you're accounting for some of the DoD support for seizure build-out?

[Amanda Lacaze, executive]

I will get Gaudenz to confirm this, but that is a combination of a grant monies received from both the Australian and the U.S. government. Is that correct, Gaudenz?

[Gaudenz Sturzenegger, executive]

It's purely Australian project.

[Operator]

There are no other questions on my side. I will now pass back to Lynas.

[Amanda Lacaze, executive]

Okay. Well, once again, thank you all. I would just reiterate that the market is not as hard as it was a couple of years ago, but we remain very -- we remain completely aligned with medium- and long-term view that it will continue to grow. And therefore, we continue to develop our business to be able to meet that future growth whilst really focusing on ensuring that we are profitable even at the lower price and more muted demand levels that we're seeing today.

So again, thank you for your interest in our business, and I look forward to speaking with you again in a month or so when we release our annual results. Thanks. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.