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Thank you for standing by, and welcome to the Lynas Corporation quarterly results briefing conference call. [Operator Instructions] I would now like to hand the conference over to Lynas. Please go ahead.
Good morning, and welcome to the Lynas investor briefing for the March 2020 quarter. Today, the presentation -- the briefing will be presented by Amanda Lacaze, CEO and Managing Director. And Amanda is joined by Andrew Arnold, General Counsel and Company Secretary; and Gaudenz Sturzenegger, CFO. Please go ahead, Amanda.
Morning, Jen. Well, good morning, everybody. Isn't this a slightly different way of doing things? I'm trusting that everybody on the other end of the line has dressed appropriately for this teleconference, that there is a minimal amount of Lycra amongst particularly our middle-aged males and that everybody is truly dressed for success.Well, what a quarter we've had. We started with our Malaysian operations shutdown, and we finished the quarter with our Malaysian operation shutdown but for 2 different reasons. In between these 2 bookends, we delivered some excellent outcomes for our business. Certainly, during the quarter, external factors continue to be very varied and challenging. But we're paid to manage our performance to these sort of external challenges, to ensure that our business comes through it hopefully stronger than we went into it. So today, we're all subsumed with the issues of the COVID-19 challenges. But remember, during this quarter, our business has dealt with licensing challenges, some very dynamic Malaysian politics, some influences on the market demand from the early effects of COVID-19 in China, the change in government in Malaysia and of course, ultimately the Movement Control Order in Malaysia, which has seen us shut our Malaysian operations. But as I said, we're paid to manage our response, and our approach of forming small, focused and expert teams to deal with each of these challenges has paid off for our business.Taking, first of all, because it was the thing before COVID-19 that tended to engage everyone most, was really understanding where we were at and progress on the licensing, which of course, as you would recall, our license was due for renewal on the 3rd of March. Our Malaysian license team, ably led by Dato' Mashal and Professor Ismail, really delivered some outstanding outcomes, continued engagement with relevant regulatory bodies and ensuring that we met the conditions that were associated with the renewal in August last year, saw us with the renewal of our license for a 3-year period. Alongside that, Mashal and Ismail and other members of their team ensured that we had a resolution to matters associated with the PDF requirements in Malaysia. We have a very clear plan and a pathway to success for that and issued a contract for the management of that project to GSSB.In terms of production, we started up, started up very well. And then, of course, we shut down. But we've been able to use our time to really ensure that when we stand up, we stand up even stronger than we did in January, and I was particularly pleased with our start-up process at that time. So if we look at just some of our results and the highlights of those, and I know you have all read the report, but nonetheless, we are in, I think it's one of the most overused expressions at present, but very challenging times. For us, we've gone into this in the strongest position that our company has ever been financially. We've got a strong balance sheet. We've got excellent cash balance, which enables us to manage our way through this process. But during the quarter, production, notwithstanding that we lost probably up to about 21 days of production, at 1,369 tonnes for NdPr production was truly excellent. And we were on track to really an outstanding quarter in terms of production given that the first 2 weeks was much slower with the start-up from our shutdown at the end of December. We -- also, our total REO production was up on the previous quarter. So this is a reflection of improved management. We're in always a state of looking at continuous improvement, so improved management at both sites and indeed improved management in terms of the way that we are integrating between both of our sites. So for example, one of the things that we implemented, which seems small and maybe gets lost amongst many of the other things we're doing is a new circuit in Mt Weld to deal with the carbonate in our raw material, which saw us being able to deliver a better outcome in Malaysia. In terms of sales, certainly, the market in general has been subdued and that has reflected some of the early challenges in China as a result of the early influences from COVID-19 in China, but demand outside China remained strong even though prices were not as robust as we would like them to be. But the outcome is that we had good sales revenue as well as excellent cash conversion of those sales.One of the things we're particularly proud of last quarter, I think we talked about the fact that we were starting to see really benefit from our long-term strategy of contracted sales, outside China sales on price. And we're really pleased to be able to report that we reached a new low on our sales inside China. Many of you will know that I've often said Pol's KPIs go like this: Sell everything we produce, then second one is sell everything we produce outside China, and the third is sell everything we produce at a premium to the published price. So only 10% of our sales in this quarter were made into the China market. Pol assures me that this will stop at about 1% because he doesn't want to lose his job. I think we can negotiate that. At the same time, we continued -- the Lynas 2025 team continued to focus on the development of all of our growth projects including, of course, Kalgoorlie, where the project team is very capable to be working on a distributed basis as they plan and design our plant. We went for a virtual walk-through of the design at our last steering committee meeting, and that starts to really bring the whole project to life. We've released our first tender for our long lead-time products, in particular, the kiln. And those tenders have been received, and we're now proceeding to detailed tender evaluation. We've -- in addition to the heavy rare earth tender that we lodged in the previous quarter in the U.S., there was a further tender -- set of tender documentation released by the U.S. government for a light rare earth operation in the U.S., and we have submitted that during the March quarter. So we have remained very, very busy through all of these various external challenges. And I think that the outcome that you see today, whilst certainly we've seen some benefits from foreign exchange, the fact that we were able to -- notwithstanding a number of sort of significant calls on our cash as well as the limitations on production at the beginning and end of the quarter, we've been able to generate positive cash flow. And we're very proud about that. So where to from here? As we've also announced today, the Malaysian Movement Control Order has been extended through to the end of April. However, the Malaysian government has also provided new guidelines on those industries which may be able to start up, so we believe that we fit within a number of those criteria and have lodged our application and are waiting for that at present. Of course, the importance is how do we start up. And I did a presentation last week to SEDAR, where I was widely quoted -- quoting that old saying, which is never waste a good crisis. And certainly, we have being certain that we are not wasting this time. So whilst the Malaysian operations are shut down at present, we have spent the time ensuring, a, that we have operating procedures, which ensures that we are protecting the health and safety of our people, their families and our local communities. We have temperature checking on site. We have enhanced operations in terms of cleaning and hygiene procedures. But we have also been using this time to ensure that our knowledge workers, particularly our process engineers, are doing work which will ensure that we are operating better and more safely again once we start up. And we have also been using a variety of different mechanisms to ensure that our operators who can't normally do their work remotely are engaged in training activities and remaining very engaged with the business so that when we do start up, they will be well prepared for that start-up process. The other thing that this gives us an opportunity to do is even with some of the shutdown with the regulatory constraints, we were never completely shut down. We still had activities on site. Our leadership team were still very much engaged with managing daily activities. They've had a lot of more time opened up to really rethink our operating parameters and think through and model how they're going to restart this business. We would expect that there's going to continue to be somewhat muted demand in the market for at least a 6-month period. And so making decisions on what sort of throughput rate we will target and how we can do that in the most cost-effective way is something that our operations team in Kuantan have dedicated their time to over the past couple of weeks. We have an excellent start-up plan, and we're very confident that we can start up in a way which is both cost-effective whilst ensuring that we met the fresh demand from our key customers. At Mt Weld, we have continued to operate because West Australian government has nominated the resources industry as an essential industry. Thereto, we have implemented a number of new protocols to ensure the safety and health of our workforce and our local community. At present, Mt Weld's processing operations is shutdown. We've built some quite good buffer stock in terms of concentrate. And our team is focusing on using this time productively to complete a number of improvement projects that we may otherwise have had to outsource, so once again improving cost effectiveness. So we are hopeful that we will be starting up in the near future. We have a plan for that start-up. We're confident that we will be able to do it both cost effectively and in an operating sense, very efficiently. So once again, just reflecting on the fact that we had really an excellent production quarter, it showed the benefits of a number of our investments that we've made to improve things like reliability, recoveries. We've had an excellent outcome in terms of our sales development, our portfolio of customers and the markets into which we sell. We've certainly seen the benefit of the efforts that we have put into the outside -- the development of the rare earth industry outside China. Japanese demand remains steady. And we think, given the fact that we are so important to the hybrid and electric automotive segment, that we will see that balance out, to some extent, some of the subdued demand in other sectors. So finishing the quarter in pretty good shape financially and feeling pretty confident about our ability to continue to weather the COVID-19 challenges. So with that, I would be happy to hand over and take questions.
[Operator Instructions] Your first question comes from Dylan Kelly of Ord Minnett.
Three questions from me. So just talking -- you mentioned before that you're trying to estimate what your production rate should be over the next 6 months and what market demand outlook is like. How is the team thinking about this at the moment? Are you more concerned around the -- if you were to run it over 600 tonnes per month, the market may not actually be there for that? How are you trying to quantify this?
Okay. So there's a few inputs to our decisions on our production rates. The first, which is important to deal with, is the framework which is set by the Malaysian government, which is that we should have no more than 50% of our normal workforce on site. And that's of course a reflection of seeking to minimize movement within the community. So that becomes sort of a first criteria for us to think about, well, really how can we run the plant with sort of 50% on site. The second piece then comes down to really what is the fresh demand in the market and particularly in our key markets as opposed to maybe areas where people are seeking to continue to either hold high levels of inventory or build high levels of inventory. We have no great desire to be depleting our resource at very low prices. So really understanding fresh demand levels and making sure that we meet those is really important. And the third piece is really having a very deep understanding of when and how demand, particularly in the automotive sector, is likely to be affected by the continued impact of COVID-19. So on balance, we expect that we're going to run the plant at probably between 60% and 70% capacity. We think that we can do that safely. And we can do that very -- to give us really an optimum financial outcome rather than sort of consuming financial resources to build inventory either in our own warehouses or in others' warehouses.
Okay. Great. That's a great answer there, Amanda. Just turning to how this is impacting the business. So it seems pretty clear to me that Australia has got -- also Mt Weld has reasonable stockpiles. And so long as that supply chain continues, there's a lot -- that's not really the issue. This is about Malaysia and being able to operate there. When you said that Malaysia never really shuts, what does -- what did you mean by that? And can you break down what you are able to do on the site? Can you still get -- put tonnes on the back of a flatbed and put them into the port? Can you do -- perform any sort of long lead time -- or sorry, bringing forward some maintenance? Or is this effectively there's only a skeleton staff and no one's there?
It's an absolutely skeleton staff at present. What we have been able to do is that we did have concentrate both in the port and on the water. And so yes, we have been able to bring all of that on site and have that properly stored. One of the things which is helpful for us is that, as you know, we're processing a natural resource, and there is always some variability. It gives us an opportunity to really assess all of that material we've got and if necessary, to blend for sort of optimum production outcomes. We have, of course, all of our security staff on site. We have a skeleton maintenance team who are able to do some small activities but primarily are there to ensure that we're testing systems, making sure that we've got sort of our systems, all of our safety and alarm systems, working well. And we're able to do some tests which are harder to do when you're engaged in normal operations. And of course, we have our -- as I said, our knowledge workers, so that's our production leadership team as well as our engineering teams, able to do a lot of work, if not, a lot of physical work, but a lot of work on really developing plans for better and more efficient throughput. But it is a very small on-site number at present. It's across sort of 24 hours. We've got less than 100 people, so slightly more during the day and then a smaller number at night.
Okay. Great. And just in terms of -- sorry, in your latest update, you mentioned this notion that you can apply for an exemption to continue producing because of your end-use supply going into things such as ventilators. What's the decision-making process that goes or the application process like for that? And could you lead us into exactly what goes into a ventilator in terms of rare earth, just at a high level?
So actually, what I'd rather do is step back to the fact that the Malaysian government, in the extension of the Movement Control Order, also provided a new set of industries that would be considered to restart operations. This included those involved in the automotive supply chain, most importantly those who were involved in export, and of course, most of our materials are exported, those involved in the oil and gas supply chain, and then of course there are some of the medical supply chains including medical devices. So we think that we sort of clearly fit under automotive supply chain, export, oil and gas, whilst most of the catalysts which you use in big refineries are produced in -- by the 3 big companies in North America. They then find their ways to refineries all over the world. In terms of medical supply chains, it's really not just ventilators, which are relevant to COVID-19, but it's also other diagnostic processes and equipment including MRIs and a variety of other areas as well. So materials which find their way there include magnets, clearly, but also some of the high-purity cerium and lanthanum materials, which go into diagnostic testing for things like kidney disease and those sorts of things. So as -- I think we often talk about this and the importance of rare earths and the famous phrase about being the vitamins of 21st century industry. We see that again today, which is so much as this is actually our materials go into a variety of important supply chains. So we think that with the MITI industries, the list which has been published, that we sit within that list. There's a process for making application. We have done that. But we know that just like the Australian government dealing with its 800,000 applications for job seeker allowance, the Malaysian government is dealing with a very large volume of applications to restart. And so I would not make a recommendation or a forecast on when we may or may not get that approval. But I'm -- but we think that we will satisfy the conditions as the Malaysian government works through the various backlog of approvals.
[Operator Instructions] The next question comes from Andrew White of Curran & Co.
It was just a question on -- I know you've outlined the tender that's been put out on the long lead item. Can you give me an idea on the time frame that you expect submissions for that to come back? And then when they do come back, just what it looks like in terms of where you prioritize the capital outlay in the near term on that?
So the submissions have come back. We've received the tenders. And we are proceeding to detailed tender evaluation with the tenderers. I actually can't tell you just straight off the top of my head how long we think that process is going to continue. And in terms of use of funds, clearly, we will be prioritizing those areas where we need to ensure that we have these long lead time articles -- items sort of funded now because it's too late if we don't do it sort of -- if we put it off for another 6 or 12 months. We're doing this sort of process alongside because we're relatively short of time line. We're running parallel processes with also doing all of our regulatory and approvals work.
Okay. Yes. No problem. So yes, that pretty much answers my next question just on the sense of urgency on getting Western Australia going. So yes, do you -- I guess the question I can ask is just what sort of -- you're trying to push that ahead as fast as you can. What are sort of the major tasks that we can look to expecting on the Mt Weld project -- or sorry, on the cracking and leaching project?
Okay. So as I said, there's really sort of 2 pathways here. I mean there's one which is really about approvals. And as -- I mean it's pretty exciting for us. But with everything else that's gone on, I even forgot to say this in the introduction, getting the major status -- project status by the Australian government and the lead agency status by the Western Australian government is really important for us. The fact that the Australian government has set up a critical minerals offer is beneficial for us as well, and we are very engaged with government and also with sort of relevant public service departments through this process. And I would say that we've been really very pleased with the quality of the engagement in those areas. On the other hand, the engineering, which includes plant design, plant layout, is progressing apace, and it's pretty exciting. I very often get to fundamentally sort of -- I guess what I would say is that our project team is pretty excited about it. We have our steering committee meeting. And I said to our project lead, Grant, was he having a good time. He said, "Well, yes. Actually, I'm having a really good time." Bear in mind that Grant ran our cracking and leaching. Before then becoming site manager in Kuantan, he ran cracking and leaching from 2013 at a time that, that plant was really suffering from some of the suboptimal design features. And so he has an opportunity now to design a plant which addresses all of those issues and makes it better again. So we don't see any slippage in our time line at this stage on the Kalgoorlie project. What we do see is the importance of understanding how an extended economic effect from some of the COVID-19 pandemic may affect our funding requirements. And so we're doing the work on that at present.
Okay. Excellent. Just on what's happening at the land with it being in care and maintenance, I understand that chemical costs are a major component of the input costs. What's sort of the magnitude of reduction that you've got at the moment? Is there -- is chemicals inputs completely stopped on the process at the moment? Or what sort of percentage reduction would you say there has been on those inputs right now?
Yes. So we've avoided 100% of the chemical input costs. We're not producing, so we don't need to buy them. There's some, of course, as we look at cash, in April, we're paying the invoices for material that we consumed in March, but we have no chemicals of any substantive nature coming on. Had 2 big reagents, sulfuric acid and hydrochloric acid, and both of those are gone. Essentially, the only cost that we are sustaining through this period are labor costs with a few other sort of small additions. But we're fortunate compared to many other businesses that labor as a percentage of our total inputs is a relatively small number.
Your next question comes from Chris Hughes, a private investor.
Delighted to hear everybody's well, and I just hear your frustration. Yet another quarter of forced reductions in production through absolutely no cause whatsoever of anybody on the ground. And it's just so frustrating for everybody. And I guess from my perspective, keen to put in the numbers, the big positive is what you've actually produced and sold. And whilst some of that's come from inventory, the potential is obviously there in really running at the level it has obviously out of the days that you're allowed to operate are very encouraging. Just a very simple question, Amanda. I know you have extensive insurance coverage. And I'm just asking whether your loss of profits insurance cover this business interruption caused by this virus and the imposition put on you by the requirement to close down.
I might let Andrew answer that. But as I understand it, we're probably not going to get a lot of jaws there. But Andrew, can you address that?
Certainly. Thank you for the question. The general position under business interruption insurance is that it's part of your property policy and that usually you need an underlying property damage in order to trigger recovery. And so the general position for all companies with BI cover is that they would have limited capacity to recover in this situation, and we have the same.
Okay. Unfortunately, that was the answer I thought I'd get, but I best sort of -- I should at least ask it anyway.
Your next question comes from Matthew Chen of Foster Stockbroking.
I just wanted to ask -- or I wanted to reconcile what you're saying about fresh demand over the next 6 months against, I guess, the sort of sales volume in the last quarter that seemed sort of pretty strong to me and obviously in comparison to Q2. Q2 is a bit an anomaly because that was the tail end of the processing limits for calendar '19 year. But there didn't seem to be sort of any issues getting product out through your chain over the last quarter. Just wanted to sort of reconcile that with what you're saying about fresh demand and the inventory build.
Well, we clearly have to think about what's likely to happen to demand coming out of the restart from the various COVID-19 shutdowns. And so that's really what we're going to be focusing on, making sure that we meet that demand.
Yes. Okay. And just to clarify, because my phone just dropped out for a bit there, it was 60% to 70% of capacity, wasn't it?
Yes.
That's how you're thinking about.
Yes. So we're still doing some further work on that. And as I said, what we want to make sure is that we're able to satisfy the demand for our strategic customers. But we also want to make sure that as we start up, we do it on sort of a -- with a focus on costs, which see this being giving us really an optimum financial outcome because the world is an uncertain place, and preserving our strong financial position and balance sheet to allow us to come out of this -- our objective is not to come out of this alive, it's to come out of this stronger, is sort of one of the things that is really exercising the minds of everybody in our production team.
Fair enough. And just wanted to clarify. You said at the start of the call, was it 21 days lost production last quarter or something like that?
Thereabouts. No. Talked about -- it was effectively 10 days at the end of the quarter, and when we talked about the time to get sort of everything filled up and sort of running smoothly at the beginning of the quarter, that's not a precise number. But it's around about that sort of number that we're talking about.
And with the Malaysian government exemption process, could you specify which government department is handling that?
MITI.
Okay. MITI, I see. You've got a fair bit of -- well, you've always got the relationship there, and you've got a fair bit of experience dealing with them, haven't you?
Yes. Look, I think that if we look at the way that Malaysia has responded, and many of my friends here in Australia will ask me about it and ask about it compared to, say, some of what's been printed about Indonesia, and I'm not as familiar with Indonesia clearly, but Malaysia has demonstrated, I think, again, that it is -- whilst it's still classified as a developing economy, that there's a very mature community. Its response has been actually very similar to the sort of response that we've seen here in Australia. Its infection rates have been pretty low, sort of comparable to what we see in Australia. The decisions are being made by the Ministry of Health. But within those critical decisions, just like here in Australia, it's the Chief Medical Officer, the Ministry of Health is setting the framework. But the implementation of that activity then sits with MITI. And so I would say that Malaysia has performed -- the new Malaysian government has performed really very creditably through this process.
It's quite a challenge for a new -- incoming government, isn't it? And just -- that's just one cabinet, and that's been dealt with this hand.
So I think the fact that the -- in fact, the new government does have a lot of experienced and older hands in it. So a lot of the government ministers have been ministers previously. I think that, that is certainly working in Malaysia's favor.
There are no further questions at this time. I'll now hand back -- apologies. Your next question comes from Michael Evans of Acova Capital.
Just I'm a bit confused, I think, on the Malaysian government regulation. You mentioned -- I understand that sort of extended the shutdown to about the 28th of April at this stage. But then you also mentioned that one of the first criteria that you have to meet in getting it back to production is no more than 50% of normal workforce on site. Is that the criteria today? Or is that the criteria post the 28th of April, assuming they lift total restriction? Or -- and are you working on and confident that you can produce at 60% to 70% of 7,200 tonnes of NdPr capacity with 50% of your workforce? Are those questions clear?
So I don't know what the Malaysian government is going to say on the 28th of April, right? What I do know is that the conditions for any industry operating at present are that it should have no more than 50% of normal staffing levels. And so...
At present right now.
Sorry?
At present, okay, right now.
At present, right. So if we get an approval to start up, which is what we're sort of hoping within the latest guidelines, if we get an approval to start up in -- before the 28th of April, then we would expect that it is going to be under those very clear guidelines, which is 50% of staff on site. So that, as I said, is about really seeking to minimize the amount of movement that there is, and therefore, the opportunity for cross-contamination, and we are supportive and compliant with that. Can we run at 60% to 70% under those conditions? Yes, we can.
Okay. So the current conditions, really simplistic, you can't produce anything at the moment, and you can't have any more than 50% of your normal workforce on site. But you're -- in your request to start production, you're assuming they'll -- you wanted them to add, so you can produce, but you still can't have -- if you can produce with 50% of your normal workforce on-site, we'll let you produce. That's sort of roughly what you're looking for.
Sure. Yes.
Yes. Okay. And you're confident you can produce 60% to 70% of 7,200 tonnes of NdPr with half your workforce. I've got your answers.
Yes. Just sort of following that up a little bit further, that's no different from the sort of conditions here in Australia, where we're being asked to ensure that all those who can work at home, work at home. So when we talk about Mt Weld, we have only one of our metallurgical team on site. The others are working from home. Our planes have only -- are only carrying 50% load. We brought in additional buses so that we have no more than -- we only have little, sort of minibuses. We have no more than 6 passengers on each bus. So it is consistent with the same sorts of guidelines and constraints that we're dealing with here in Australia.
Your next question comes from Tim Ainsworth, a private investor.
I'm just wondering if you could update us on the Blue Line joint venture, Amanda, what progress there at the moment. Or is it dependent on the U.S. tender result?
Yes. We're waiting on the U.S. tender result. And we've not got that at this stage. As I think everybody knows, it's even got a -- passing consumption of news would know that the U.S. government is pretty consumed with other matters at this stage. On the other hand, some of our team were in the U.S. at the time that a number of the travel restrictions came into play and have been using that time very wisely with some product development and process development work. So I think that we're looking to develop a business there which is a combination of heavy rare earth plant, separation plant as well as other specialty materials. We're using our time now. I mean with all of these things, how do we use this extra thinking and time that we've got to the best possible effect, but an update on that really is dependent upon the U.S. government being open for business again.
Okay. Just one other, Japanese media comment middle of last month, it was about the 14th of March, Amanda, was talking about the -- increasing the reserves in the site reserves. So I think we mentioned rare earth elements, which I presume would be it. Any comment on that? Has the -- have you had any contact with that, that you can talk to us about?
No comment.
There are no further questions at this time. I'll now hand back to Amanda for closing remarks.
Okay. Well, once again, thank you all. I'm very pleased with our performance during this quarter, particularly pleased with the way that everybody in the business has manned up to the various challenges which we've been presented. And I remain very confident that we're going to come out of this in good shape and actually with the work that's being done by our various teams with a really refreshed and energized and improved operating rhythm. So thanks for your attendance today and look forward to keeping you updated as we move forward.