Neo Performance Materials Inc

TSX:NEO

Earnings Call Transcript 2022-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Neo Performance Materials Second Quarter 2022 Earnings and Business Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ali Mahdavi. Please go ahead.

[Ali Mahdavi, executive]

Thank you, operator, and good morning, everyone. Thank you for joining us this morning. With me this morning are Neo's President and CEO, Constantine Karayannopoulos; and Rahim Suleman, Neo's Chief Financial Officer. And as a reminder, a replay of this call will be available starting tomorrow in the Investor Center of our website located at neomaterials.com. Before we begin management's remarks, please note that some of the information you will hear during today's call will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns and future business outlook, including potential expansion plans. Actual results or trends could differ materially from those discussed today.

For more information, please refer to the risk factors discussed in Neo's most recent financial filings, which were filed on SEDAR earlier today and are also available on our website. Neo assumes no obligation to update any forward-looking statements or other information which speak as of their resection. Financial amounts presented today will be in US dollars. Non-IFRS financial measures will be used during this call today. Further information regarding Neo's use of non-IFRS measures is available in Neo's earnings press release, which is available on SEDAR and on our website at neomaterials.com. Let me now turn the call over to Constantine.

[Constantine Karayannopoulos, executive]

Thank you, Ali, and good morning, everyone. For the second quarter 2022, we're pleased to report yet again excellent quarterly performance throughout the company. In the face of continuing volatility globally, customer demand remained healthy, underpinned by pent-up demand for end consumer products. Pricing for new critical materials remains at favorable levels due to this higher demand. And for the first 6 months of the year, we delivered our best financial results in the company's history. Our second quarter sales were a record $168 million with net income of $14.7 million or $0.36 per diluted share and adjusted EBITDA of $26.5 million. I'm very proud of our team's ability to deliver on our plan by reliably and consistently providing innovative products to our customers. We remain thankful to our customers and suppliers and all of our partners for their continued support.

On the heels of our strongest first half, the perception of uncertainty ahead of us continues, particularly in these headlines and some recent earnings reports. The challenges that have been with us for the past 2 years largely remain namely supply chain shortages, including semiconductor chips, shipping challenges, COVID lockdowns in China and manufacturing disruptions. The war in Ukraine continues along with the associated sanctions. The new challenges are weighing down consumer confidence, such as central bank interest rate, hikes around the world to battle back against inflationary pressures. Parsing out the impact of any one of these factors in the individually, can be very, very challenging. For us, we manage through these periods of uncertainty through direct conversations with our customers by ensuring extraordinarily high levels of customer service and care. Based on continuous feedback from customers, we adjust production plans and inventory positions almost daily.

We have gone through a few very tough years as a result of this pandemic around the world. Politics, geopolitics and supply chain disruptions, and many of us have repeatedly said that what we saw over this time has been quite unprecedented. So I hope you bear with me when I, again, say that the current confluence of factors in today's business environment is still very much unprecedented. These challenges are not equal in terms of severity or duration. While several economies are experiencing negative economic sentiment or outlook, consumers are also clamoring for more cars, electronics, home appliances and increased travel to spend time with loved ones at the global lockdowns.

Of course, consumers have to wait a lot longer for their major purchases to be delivered as anyone who has recently tried to buy a new car or a computer knows. Both discretionary and large durable goods remain in high demand, but manufacturers cannot fulfill purchase orders in a timely manner. Economic case studies haven't really dealt with a scenario before. So we're seeing variability in commercial activity among our customer base. As an example, within the automotive industry, the first 6 months have played out hard on cold, depending on the individual OEM. For example, Ford recently reported a surge in sales, while General Motors says 100,000 vehicles are waiting chips.

In North America, the average car dealer inventory available for sale is about 2 weeks. That is a slight improvement from the start of this year, but remains at all-time lows since this patent data was first reported 30 years ago. Also hard and cold depending on the geography, Europe automotive sales are down nearly 20% with the war in Ukraine, while China has just recently seen an explosive surge in June. Chinese vehicle demand has dealt with the same effects as North America, combined with further intermittent lockdowns recorded this year that continue to cause market repo effects. Notwithstanding persistently strong EV demand, near-term demand for new internal combustion engine cars in China dropped significantly at the start of the second quarter and lock down related disruptions to various automotive component supply chains recover and global automotive volumes. [indiscernible] already started to observe a strong rebound of sales of light-duty vehicles in China exiting the quarter after dismal April.

We'll see if the current new vehicle acquisition tax incentives sustains this improved demand through the end of the year. The manufacturing sectors, particularly automotive in Korea and Japan have languished longer than in other economies. Indications from automotive OEMs show that unit volumes are down 10% to 15% this year and will likely continue to decline through the back half of the year. Both Honda and Toyota have recently signaled semiconductor chip challenges that will further reduce anticipated production in the coming quarters, reflective of the softer market in Japan. In the balance of the supply chain disruptions, [indiscernible] pricing remained substantially higher compared to last year. Our product average selling prices were about 50% higher compared to the previous year as to the prior year as longer-term trends discussed last quarter remain intact.

For magnetic clearance such as neodymium, praseodymium, pricing [indiscernible] through the second quarter and recent prices are down about 10% to 15% compared to the start of the year. This is largely reflective of the diminished demand within China during the second quarter as the intermittent shutdowns related to COVID created some artificial drag across the industry. COVID impacts I continue is here. As just this week, China was forced to scramble to stand new Omicron outbreaks in the hubs of [indiscernible] in provinces [indiscernible]. We're seeing reports of magnet production being down 20%, 30% with some of the smaller producers facing serious questions on their survival.

Motor manufacturers that fell victim to the ups and downs created by the semiconductor chip shortage, are still sitting on excess inventories. That led to some decrease magna buying during the quarter with prices for [indiscernible] of materials slipping instead. Taking a broader view, we'll continue to see firm demand for all of our internally produced neodymium and praseodymium molecule. At current pricing levels, innovation from our end customers continues. So what does this mean for Neo, our employees, our shareholders and all of our stakeholders?

Our manufacturing operations around the world remain efficient, but you take this in the second half of this year means that our sales pipeline has inherently a bit more risk today compared to the first half of this year. While we acknowledge there is increased uncertainty when we peel back the layers, we're still finding general positivity from many of our customers. What this looks like is that orders are not being canceled, but customers may request to delay partial shipments as they catch up to downstream supply chain disruptions.

Although raw material costs, reagent costs and other general input costs have been increasing over the last few quarters, we have been able to maintain our margins despite these cost pressures. And with operating leverage across our P&L, we've been able to expand our adjusted EBITDA and overall profitability by more than 200 basis points versus the previous 5-year average. Most of that has come with the automotive industry remaining down 10%. It's important to note that our operating model is intact and our strategic growth initiatives remain on track. With substantial exposure to the automotive, aerospace, electronics and consumer good sectors, we adamantly believe long-term demand for our advanced products remains robust.

As the automotive industry reverts back to producing more than 90 million units per year, and electric and hybrid vehicles maintained a breaking growth rates. We believe that Neo will continue to be the preferred supplier of innovative materials that will outcompete and will be designed into our customers' technologies over the next decade and beyond. One effect of the current macro challenges is that normal seasonality can be thrown to the wind. Some of you will recall previous conversations on the earnings call after the quarter when we stress the seasonality that seems to be gone by the wayside as we speak.

While European summer holidays are still in effect, production lines are operating if and when semiconductor chips arrive at the assembly door. Consumer electronics production is expected to moderate through the back half of the year rather than ramping up to meet normal Q4 holiday demand. Recent industry estimates have revised personal computer demand to be down about 10% this year as schools and offices reopen globally and the at-home surge for electronics in 2020 and 2021 eases. Demand for hard disk drives and associated motors for servers that require a bonded from a magnet solution would likely be muted as well. Yet our Magnequench volumes continue to grow for those consumer home appliances, improved efficiency technologies for automotive applications, and thermal management devices for electronics, including 5G stations, servers, laptops and gaming devices.

Let me give you one highlight. Thermal management in both electric vehicles and in hybrid vehicles is a big thing and a good case in point. There are a number of sophisticated motors beyond dry trains that use rare permanent magnets within both electric and hybrid dry trains, if various battery system components do not operate on optimal temperatures. Battery performance in vehicle range can be adversely impacted. Systems need to be actively cooled or heated depending on the required function.

All of this is done by synchronizing the refrigerant circuit with a coolant circuit to transport heat to and from different components. Neo's Magnequench's product development team has been working closely with major Tier 1 automotive suppliers in Europe, China and Japan on the supply of magnets for 2 very complex, sophisticated small motors for these systems. One is a cool and proportional valve, which performs temperature regulation in the coolant circuit while interconnecting the battery and electric axle. The other is a cooling valve which controls the refrigerant flow to switch from heating to cooling loads. Together, these and other controlled mechanisms enabled the design of an intelligent thermal unit for electric and hybrid dry trains.

Our Magnequench rare magnets are vital to the systems operational precision, size and weight, all of which help to optimize battery performance and extend vehicle range. And we have the critical know-how and credibility with customers to help them develop the next-generation technologies. We see sizable growth opportunities for our materials in vehicle micro motors, which should nicely complement our plans to expand more significantly into vehicle traction motors. Similarly, we are developing next-generation mixed oxides with new functionalities for hybrid and internal combustion motors. While the transition towards a 2050 net neutral, glide path is in front of us, improvements are also required for traditional gas, diesel and hybrid platforms. We continue to believe that there will be a place this decade and beyond for those new products.

Our portfolio for aerospace and electronic rail metals continues to outperform our internal expectations despite aerospace also observing supply chain disruptions for key components. By diversifying our new product applications, we adapt into a strong value-add portfolio that contributes meaningfully to our bottom line. And now that aerospace production in next-generation electronic chip technologies continue to improve, [indiscernible] metals team is working army to meet those needs with both primary and recycled metals for super alloys, super alloys and other critical applications.

Operationally, we continue to make strides in improving our manufacturing sites and enhancing our customer relationships. We're pleased to report that our Magnequench facility located in Tianjin, China was recognized with an advanced safety production award this past month. We're selected as one of 10 companies to receive this honor out of more than 1,200 eligible enterprises in the in the area. Our teams have been building a culture of accountability and safety for years in everything we do, and we're proud of the systems we have implemented. The systems focus on worker safety, identifying dual prevention methods, ensuring continuing maintenance and improvement and effectively managing and communicating risks and preventive measures with both our employees and local government authorities. It's a tremendous honor for the team to have received this recognition. It also sets the tone as we further implement and integrate ESG tracking systems as we continue to outperform our chemicals and metals industry peers of health, environment, safety and sustainability metrics.

Our Magnequench and rare metals teams have quickly moved forward to set up ESG working as teams to help investigate and implement our strategic initiatives following our published sustainability report. In the same manner that our teams have organically built strong safety systems, we're methodically working through our long-term planning for sustainability systems, which are the frequent subject with customer and other stakeholder inquiries these days. In Europe, we also continue to make headway with our centered magnet expansion plan. Our Magnequench teams are progressing rapidly on engineering, permitting, and construction planning for a greenfield neomagnet manufacturing plant in Estonia to serve European automotive OEM and Tier 1 customers who clearly want us to make these products there as they ramp up electric vehicle production. Estonian government leaders also continue to express their support for assembling the financial packages necessary for us to make a final commitment to proceed. We very much appreciate their continuing support.

A key reason that we expect Neo will continue to outcompete is our proven commitment to ESG principles with traceable and diverse supply chains that operate across every major region, Asia Pacific, Europe and the Americas. Advancing our ESG agenda is not only a matter of corporate [indiscernible], it is an integral part of our long-term strategy to increase the profitability of our business. While some skepticism, perhaps even cynicism, is evident as examples of ESG green washing the bound. We beg to differ with IPO, in fact, we're finding that the world's leading OEMs and Tier 1 component suppliers not only require adherence to more rigorous and responsible principles, but they're backing it up with higher price commitments to secure responsibly sourced materials and components. When lowest cost is no longer the primary determinant than the real guide path towards decarbonization can be accelerated.

Where we're not bound by confidentiality obligations, I'd like to share with you specific conversations with large global customers clearly expressing their view, which is a marching order for us and should also be for the rest of the industry that they will reward in "competitiveness beyond total cost ownership." It is for this reason that our European expansion strategy included identifying a site that would be largely independent of [ bushing ] gas supplier disruptions, increasingly powered by renewable energy, expanding optionality of upstream resource feedstock from more jurisdictions and pursuing end-to-end circular vertical integration from magnetic materials.

We're confident that Neo center magnets will be produced in Europe with some of the industry's lowest carbon footprint and appealing to the highest ESG standards in our industry. This will result in Neo's magnets being the most long-term competitive option for European EV manufacturers and other premier magna mortar producers as it will help our OEM customers to continuously improve their life cycle assessment, which is an increasing priority for them. We believe that this set of value differentiators will drive long-term growth and profitability for Neo.

We also aim to further diversify our sources of raw materials, and we have significant experience in assessing strategic mineral resources around the world. I'd like to share that we are in late-stage efforts for a potential transaction that would provide Neo with rights to very attractive magnetic materials rich mineral resource. This type of diversification would further and ideally complement our current European rare earth magnet growth strategy. This is in addition to our current supply agreement for rare earth concentrate that is being shipped from the United States by Energy Fuels out of Utah. We've been especially pleased with the cooperation bandage of fuels to improve the quality of the feed stock and heavy mineral sands based concentrate that skews favorably towards the magnetic elements.

We're also very supportive of their efforts to secure raw material sources globally as entered by the latest deal in Brazil. The global rare earth industry is being remained, and we are happy to be working with the right partners in both directions of our supply chain. It is also important to note that we have not experienced any supply disruptions from our rare earth material suppliers related to the conflict in Ukraine. The ongoing sanctions programs around the world continue to evolve, and we're diligently monitoring the situation. Our raw material sourcing from outside of Europe continues on its course to both Rare Metals as well as chemicals and oxides. From an operations planning perspective, we anticipate that a potential natural gas shortage to the chemicals industry may tighten the supply of certain processing reagents and other materials that we utilize, but we do not expect to have any direct or lasting impact on our ability to operate our Rare Metals facilities.

There's also minimal usage of Russian natural gas in our European operations, either directly on site or indirectly as a primary source of energy generation. As electricity generation is now primarily derived through local biomass. While we continue to monitor the situation, we pulled back on sales and ancillary products to certain firms that might indirectly [indiscernible] to sanction Russian enterprises. We believe an overly cautious approach is prudent given the highly opaque and fluid ownership structures of many private enterprises in Russia.

I'm proud of our team's ability to navigate the current supply chain headwind, and I'm confident in our ability to continue to deliver exceptional products to our customers in any region. We have seen challenging price and supply/demand environments before, and we know what it takes to deliver innovation and new technologies. Our current operating profile remains strong, and we remain acutely focused on further diversifying our upstream raw material supply and delivering environmentally sustainable materials for our customers. I'll now turn the call over to Rahim for financial details on the quarter.

[Rahim Suleman, executive]

Thanks, Constantine, and good morning, everyone. Through the first 6 months of the year, we are pleased to report that our product sales and operations performed largely within our expectations and at significantly higher levels than past performance. The second quarter continued to show very strong sales performance, driven by sustained elevated pricing environment. Customer demand for our products mostly remained healthy during Q2, noting that Constantine elaborated on the overall macro events that have led to heightened uncertainty across several industrial sectors. In particular, our geographic sales profile during the quarter was underweight toward Japanese customers as the supply chain interruptions of semiconductor chip shortages more acutely impacted some automotive component manufacturers there. This is particularly true as a driver for our lower Magnequench volumes, but we remain confident in our relationships with our customers and the programs that we have secured that the lower volumes are related to macro effects rather than company-specific issues.

For a review of the quarter, we reported a record sales figure of $168.2 million, driven primarily by increased pricing, which is about 50% higher compared to the prior year. This improved pricing profile for our value-added products helped offset volume declines, the causes for which were discussed earlier. As a reminder, the first half of 2021 had unusually high volumes as the advanced materials space refilled downstream supply chains following the 2020 COVID year. We reported net income of $14.7 million or $0.36 per diluted share, an improvement of 13% over the prior year, and we reported adjusted EBITDA of $26.5 million, a 19% improvement over the prior year. On a sequential basis, our profitability remains near all-time highs, but declined relative to the prior quarter related to the lead lag effect as our cost of sales began to catch up to a slowing pricing environment.

General rare earth pricing remains at recent historically high levels, which continues to provide enhanced top line and additional dollar value margin in our income statement. Pricing for the magnetic materials, such as neodymium, praseodymium, terbium and dysprosium, moderated a little in the quarter while remaining significantly higher than recent previous years, while other key rare earths were largely stable. Although our pass-through pricing mechanisms and focus on our value-added margins are largely agnostic to these price movements over the longer term, the second quarter had a mix of some positive and some negative impacts related to lead lag. These dynamics make it paramount for us to be more selective in our raw material sourcing and is a testament to our ongoing focus on strategically expanding our base of raw material suppliers. There remains adequate raw material feedstock in the market today, and our local teams remain perfectly positioned to pursue the most economically beneficial sources available.

We are diligently managing our inventory volume levels and seeking whenever possible to convert higher priced inventory units into cash. The fundamental economic model remains intact, and our free cash flow position improved in the quarter. This is entirely normal following a relatively volatile pricing environment. In a rising pricing environment, we'll see the benefit appear first on the top line, as shown by the recent quarter's record performance and then cash generation flows through as pricing stabilizes. Our cash flow from operating activities improved sequentially from the first quarter by nearly $14 million, and our additional investment in overall working capital slowed substantially. If current pricing environments remain stable, we would expect to not to continue to build working capital as we have in the last year, but rather, we would convert more earnings into cash.

Our balance sheet remains healthy with $66.2 million of cash and cash equivalents, and our net cash position improved sequentially. During the quarter, we also invested $2.6 million in the plant property and equipment and distributed $3.2 million in dividends to shareholders. As we pursue our strategic growth initiatives, including the expansion of our Magnequench portfolio into centered magnets outside of China and the relocation and expansion of one of our primary mixed oxide production facilities, we anticipate that we will fund these initiatives, primarily through a combination of our existing balance sheet strength, cash generated from operations and debt financing, both existing and anticipated. We remain committed to pursuing our long-term strategic growth initiatives and are well positioned to take advantage of long-term trends for new precision motor innovation, next-generation catalyst technologies and further improvements in aerospace and the electronics industries. I'll now turn the call back to Constantine for closing remarks. Constantine, are you with us?

[Constantine Karayannopoulos, executive]

Sorry, Rahim. I was on mute. Thank you. There is a lot of positive momentum occurring throughout the company, and we look forward to continue to update all of you on our strategic growth initiatives. While I usually prefer not to comment on Neo's relative valuation in this forum, it is obviously a key piece of information that myself, our Board of Directors and our shareholders are keenly aware. Suffice to say that we do not believe that Neo's underlying value proposition and growth potential are adequately reflected in our market value today.

We're proud of our accomplishments over the past 12 months, and we're keenly focused on unlocking additional growth through our [indiscernible] expansion plans within Europe and whatever comes next after that. Yet, the trading range of Neo's common shares over the past quarter, in my opinion, is more reflective of mature conservative value-oriented company that [indiscernible] growing advanced materials, specialty materials leader that is supplying some of the largest high-profile companies in the world. For those of you who know me and our management group as well as our company's history and culture, you very well know that we're not stock promoters.

To shamelessly plagiarize our friend and partner, Mark Chalmers, CEO of Energy Fuels, "We're doers. We're not talkers." We have a long-standing record of executing to plan in order to build sustainable value. Yet, at recent trading levels, we're entering territory where we, as management and the Board, as we are fiduciaries, are required to evaluate strategic alternatives. We believe adamantly in the underlying value of our business. And if partnering with others that also recognize that value or otherwise pursuing the pass will help to accelerate our growth, then we will strongly consider them. Listen, I've talked long enough, I appreciate your understanding and neither I nor the company will be taking additional questions on this specific topic, but we'll be happy to open the lines for other questions at this time. Operator?

[Operator]

[Operator Instructions] We'll take our first question from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, analyst]

Constantine, you talked about being in the late stages of a transaction to secure some rare earth feedstock. Can you provide any more detail on that? Are we talking about an investment in a mine? Or is it a byproduct type of deal? And any comments on the geography?

[Constantine Karayannopoulos, executive]

Yes. I've hinted at this in a previous call. In the last couple of months, we've gotten into the details and we're getting pretty close, as I said in my comments. It's a deposit. It's not a mine. It's a primary deposit in a friendly jurisdiction, high ESG jurisdiction and also one that would allow us to have fairly limited carbon footprints with regards to supplying that material to either our plant in Europe in Estonia or to North America. Beyond that, given that there's a few more conditions to come together, there's a couple of more shoes that have been to drop before I can openly speak about it, but we're very pleased with what we managed to do. And this is, again, part of our vertical integration strategies, both downstream and upstream, but we're certainly very pleased with the state of affairs and how much progress we made here. But I can't really comment much more on that, yet.

[Yuri Lynk, analyst]

And what type of capital commitment are we talking and source of funds?

[Constantine Karayannopoulos, executive]

Sure. It's shockingly low. I mean we're certainly not betting the farm, and we're finding a lot of cash flow. It's not going to put it then in our working capital or anything like that. So I do expect that we should be able to comment in the near future about it. It's just that right now, I really can't provide any more information.

[Yuri Lynk, analyst]

One for Rahim. Just with rare earth prices leveling off, declining slightly in the last few months, should we be expecting Q3 margins to approximate your historical run rate?

[Rahim Suleman, executive]

Yes. I think there's probably a mix in there. So I think that generally, as prices have now been at least reasonably stable for 6 months, that's a true statement that things will return to normalized margin levels without the lead lag. But as we've mentioned before, higher pricing levels, and we certainly are at higher pricing levels do allow more dollar value margin. So we even independently lead lag, certainly, though, I think that the benchmark is higher than historical.

[Constantine Karayannopoulos, executive]

Yuri, before you go, let me jump in and also want to stress that the deal that I'm referring to, the upstream deal that I'm referring to, just because it's not going to put a dent in our cash balance is not going to be dilutive. We're not going to use stock to do it either. So it will be a nondilutive fairly with a very strong security of access to the material. But again, we should be able to talk more about it in the next little while. So we'll have a lot more to say at that point.

[Operator]

We'll take our next question from Frederic Bastien with Raymond James.

[Frederic Bastien, analyst]

I know you have provided some goalpost in the past, but I'd like to go over your expansion plans in Estonia again and what sort of capital requirements you're looking at. Perhaps, I'll start with the easiest one, your ambition is to increase rare earth processing capacity, which obviously, is a natural extension of what you're already doing at Silmet. What are your ultimate capacity goals and whether it's doubling or tripling capacity? And what kind of investments are you contemplating to get you there?

[Constantine Karayannopoulos, executive]

It's a multi-faceted question. Our expansion in Estonia and whatever upstream deals were put in place will continue to be driven by our magnet expansion. At this stage, Phase 1 of what we're planning to build for magnet capacity can be adequately serviced through our existing capacity. Phase 2 will require either buying more NdPr [ UiTb ] in the market or putting together an expansion something in the order of doubling, perhaps a bit more of our existing capacity, a rare earth separation capacity, in Estonia, and even more so expanding into heavy rare earth production. That we expect will be in the tens of millions of dollars in order to achieve that. And for us, of course, it's a lot easier to expand an existing facility than to build a grassroots greenfield other facility somewhere where the infrastructure doesn't exist. So perhaps the capital cost for the expansion in rare earth production around Estonia will be significantly lower than any other greenfield projects that you may be familiar with.

However, the progression of that development will be Phase I magnet production first, followed by Phase II magnet production and a simultaneous expansion in capacity or additional arrangements to provide that security and supply through external suppliers. Does that make sense?

[Frederic Bastien, analyst]

It's important to not put the cart before the horse. Now turning to the magnet plant. Do you have an estimate of what it will cost and how long it would take to build from the moment you break ground, perhaps starting with that first phase and then moving on to eventually a second phase?

[Constantine Karayannopoulos, executive]

Yes, Phase 1, we're looking to do something in the order of 1,500 tonnes a year of alloys, which will translate into something in the order of 400 tonnes of year magnets. That number keeps creeping up, given the feedback from customers, both Tier 1s and OEMs in Europe. So I wouldn't be surprised if by the time we break ground, the final design is even higher than that. But wrong numbers, that's sort of the ballpark that we're looking at. Phase 1, we expect it'll cost in the ballpark of, perhaps with inflation and material price pressures, raw material price rather $50 million to $60 million to put it all in place, and Phase 1 plus Phase II, which would see this grow to something around the 5,000 ton a year magnet capacity should be in the $200 million ballpark. Again, now we would have access to a number of funding mechanisms, both grants and low interest loans in addition to our own balance sheet and other more market loans reflecting ongoing rates. But we maintain pretty confident that we can finance this capacity expansion in this new plant construction adequately.

In terms of timing, I think what we're talking about is a construction period of the better part of the year. We have the major components identified. We have been having conversations with the key component suppliers. And I do expect that if we were able to break ground by the end of this year, we should be in a position to start production or ramping up by the end of next year. So it would be a 2024 ramp-up event that would allow us to hit the ground running at full capacity by 2025, which is really the objective that we're trying to lead as expressed in terms of demand by one of the largest OEMs in Europe that really need us to be in place in operating by 2025.

[Frederic Bastien, analyst]

How much of government assistance are you looking for with respect to partly funding that expansion?

[Constantine Karayannopoulos, executive]

In Phase 1, because we are engaged with focus on these discussions for Phase 1. At least what we anticipate and what has been expressed in terms of all the discussions we're having is something in the order of about a 20% capital grant. So out of the $50 million or so, where we expect to get something in the order of $10 million or just north of $10 million. Anything more than that would be a pleasant surprise, would be welcome, of course, but we think that this is very doable and it's well within the parameters of the granting mechanisms in Europe as part of the various funds that have been designed to promote green technology and supply chain resilience here.

Now for Phase 2, I would be a bigger project and they would qualify for grants and the different programs that we expect could be even larger than the 20% ball park that I mentioned, but that's another [indiscernible]. I don't want to get too far ahead on this.

[Operator]

We'll take our next question from Mark Neville with Scotiabank.

[Mark Neville, analyst]

Do you mind just repeating, sorry, what you said about the strategic alternatives?

[Constantine Karayannopoulos, executive]

Sorry, the strategic what?

[Mark Neville, analyst]

Do you mind repeating what you said about the strategic alternatives?

[Constantine Karayannopoulos, executive]

I'd be happy to read my script. Yes, perhaps there was some frustration that was coming through in my comments that given the performance of the company, we look at the share price, and there's a disconnect there, and we can't really bridge that. All I was saying is that as we're being approached by folks who want to do things with Neo, we will be a bit more receptive than we would have been, say, a year ago, simply because if we see opportunities to do something a bit unconventional to increase value for our shareholders, we will look at alternatives that perhaps we were not willing to look a year ago. As simple as that, whether those are private equity, privatization, M&A, whether it's the whole range. There are a number of conversations taking place. But of course, I can't say much more than that. But all I'm saying is that we are much more receptive to approaches and those approaches are materializing.

[Mark Neville, analyst]

Maybe just on Paul and Yuri's question on the upstream. So I'm clear, I mean, you're not looking to get into mining, correct? You said it's a... yes, sorry?

[Constantine Karayannopoulos, executive]

Yes. We're not looking at an existing mine, but we are looking at a deposit that could become a mine. Again, it will become a lot more clear when we are able to talk about it. But honestly, when you have mining companies looking to become magnet companies and enjoying multiples that are in the stratosphere, I think it only makes sense, from a business point of view, beyond markets and shareholder expectations. I think it makes all sense in the world from an operating perspective to be looking to secure our upstream. This is what our customers need.

We are buyers in the market, which means we cannot control either our cost of raw materials or we cannot control, that we cannot fix our prices or make our pricing a bit more predictable. And this is something that supply chain is desperately need. The OEMs, the Tier 1s are screaming for price predictability. And unless we own the dirt on the ground, we cannot give them that. That's all we're saying, and this is really an effort not only to diversify away from resources that have to come a long way from a long way away, but also to create a cost structure that is a bit more predictable, and we have a bit more control of it. As simple as that, Mark.

[Mark Neville, analyst]

The grants that you're waiting on or you're talking about Phase 1, is that with the Estonian government or is that with the EU?

[Constantine Karayannopoulos, executive]

Well, it's EU funds that have been awarded to Estonia to distribute as they see fit, but also every brand needs to be blessed finally by the EU on ESG and other grounds. So it's a bit of both. The Estonian government needs to pick the project that they will fund, but then ultimately, those projects need to be also approved by Brussels. So it's a bit of a circular approach.

[Mark Neville, analyst]

Do you or could you share with us where you're at on the process or where the application is? If it sits with Estonia or EU.

[Constantine Karayannopoulos, executive]

Yes. Originally, as I said in previous calls, that process, the file submission is opening up for all of Europe at the beginning of September. Estonia through their efforts and our efforts open the process a little sooner. We have filed them. We've gone back and forth in the various officials in the government. We are getting feedback. And we think we're in an excellent position to qualify for that support. But again, as I said, the decisions by the Estonian government have not been made, other than we've only received encouraging signs and positive feedback on the quality of our file, but no decisions yet. And once the Estonian government makes the decision, or that recommendation, that decision needs to be improved by Brussels. So we're still in the early parts of the process, but we're way ahead from where we were 3 months ago.

[Mark Neville, analyst]

Could you start construction or work before the grant? Or would that disqualify you come grant?

[Constantine Karayannopoulos, executive]

No, no. We can start today. If we wanted to suggest that given how politics works and how priorities tend to shift in Europe, I would rather have IronCloud assurances that the support will be there. I mean, if the support is not going to be there, I think we'll need to make our decisions. And frankly, the project is attractive enough that we would eventually go ahead on our own without grant support, it's just as in order for the economics to make sense. And as I said, I think, on the previous call, this is part of managing the financial risk of the project because the market risk and the technology risk, we're pretty comfortable with.

The financial risk needs 2 unknowns to come together. One is the pricing and whatever premium to less attractive alternatives exist for European customers, and the second is CapEx support, which is this. I think when it all comes together, it makes for a very attractive project. If one of those two parameters is not there, the project is not as attractive, but still doable. So we would prefer to make sure that all of those conditions are in place before we start. But if things get too delayed, as you said, we might decide to go on it alone without grants. That would not be a preference.

[Mark Neville, analyst]

And the pricing arrangements you would negotiate with the OEs or the customer, how exactly would that work? You made the comments a few minutes ago about not controlling your feedstock and the price. So I'm just curious how would the [ different ] long-term pricing arrangements work?

[Constantine Karayannopoulos, executive]

Well, not too differently from what our pricing arrangements are now where we do have a formula with pre-well every one of our Magnequench customers that the price gets adjusted either monthly or quarterly or semiannually or annually, given what happens to the prices of our raw material inputs. I would expect to see that formula continue until -- the main reason for that is none of the major raw material producers, not on the mining companies, not [ Balto ], not Shenhua, not [ Liners ] or e-materials are willing to provide long-term predictable pricing. It's all spot. And of course, that cuts both ways, mind you. But I believe that if a company like us eventually controls its raw material cost, then we would be much more willing to at least a portion of that output sell it at much more predictable longer-term pricing contracts.

[Mark Neville, analyst]

Constantine, you mentioned, I think mix outside capacity relocating some of that. I think that's new, maybe not. But can you just maybe talk about that?

Constantine: Yes. This is a project in China that we referred to in the past and talked about in our disclosures. We are upgrading and moving our mixed oxide capacity within the same area to a new industrial park and that's something that we've been working on it for about a year or so... Yes, this will cancel the project we talked a little bit in the past.

[Operator]

We'll take our next question from David Ocampo with Cormark Securities.

[David Ocampo, analyst]

Just a couple of quick hitters, Constantine. A follow-up on the pricing dynamic that you're talking about there. Are your customers willing to pay a premium for diversifying their supply chains and sourcing material from Europe as opposed to China?

[Constantine Karayannopoulos, executive]

The short answer is, yes. However, that premium comes with a lot of strings attached. It comes with high ESG performance. It comes with low carbon footprints. It comes with a circular operation. It comes with supply chain resiliency and so on and so forth. They're not going to pay us a premium just because they like us or just because we're neighbors in Estonia, we need to put all those things together in a way that makes sense and allows them, as I refer to my comments, to continue to reduce their life cycle carbon footprint, life cycle effect and so on. So it's not a simple case. And please don't take my comments wrong, this is not clearly, it's not an effort to lessen dependence from one particular jurisdiction.

Although anytime you have a supply chain concentration in one jurisdiction that comes with inherent risks as we are finding out continuously with lockdowns and so on and so forth. So I think it's not healthy for the industry to be reliant on one particular jurisdiction for the vast majority of its product or purchases. So I think supply chains are coming together perhaps in slightly different ways in order to make those supply chains much shorter, much more local and much more resilient. And we are trying to take advantage of that. But at the same time, that performance needs to come together with an extremely high ESG set of practices that allow all these OEMs to deliver on promises and expectations that they have been making and setting over the last few years. David, I don't know if that answers your question, but...

[David Ocampo, analyst]

That was good and I'll leave it there.

[Operator]

We'll take our next question from Ian Gillies with Stifel.

[Ian Gillies, analyst]

With respect to funding of Phase 1 in Estonia, you mentioned a $10 million grant potentially coming in. Is there additional government financing outside of this through a loan as well? Because if we go back in the course of time, I think at one point, this was thought to be funded 50% through government lending and 50% through cash on hand or some other source of funds.

[Constantine Karayannopoulos, executive]

Yes. Listen, in addition to the brands there, both the EU and the Estonian government made it very clear. We have been in discussions with funding agencies in Europe, whether it's the European [indiscernible] and so on, who made it very clear that this project would qualify for low interest loans. To what extent that will be the case, will know soon enough. But yes, the idea is to provide a financing package that includes grant, low interest in homes, perhaps some market loans and on cash.

[Ian Gillies, analyst]

And just I wanted to get one last clarification on the comments around potential strategic alternatives. Are you able to say whether you're actively engaged or would you just qualify what's going on right now is interesting conversations.

[Ali Mahdavi, executive]

Yes, it's Ali. We've made it clear that there's no questions on this. Obviously, it's not the forum to discuss anything material like this, but it was just more indicative of our view on valuation. So we'll leave it at that.

[Operator]

We have no further questions in the queue. I would like to turn the conference back to the presenters for any additional or closing remarks.

[Ali Mahdavi, executive]

Thank you, operator. On behalf of the Neo team, again, we'd like to thank you for dialing in today at getting the update on the quarterly results. If you have any questions, as usual, please feel free to reach out to any one of us. I'm available, and we look forward to further updates, which will be coming up. And as Constantine said, stay tuned. We've got a lot of good things that we're working on. That concludes today's call. Have a great weekend, and I'll pass it back to the operator to close the call.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.