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Good day, and thank you for standing by, and welcome to the Lynas Rare Earths Quarterly Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to Lynas. Thank you. Please go ahead.
Good morning, and welcome to the Lynas Rare Earths investor briefing for the March 2021 quarter. Today's briefing will be presented by CEO and Managing Director, Amanda Lacaze. And joining Amanda for the briefing are CFO, Gaudenz Sturzenegger; General Counsel and Company Secretary, Sarah Leonard; and VP, Strategy and Investor Relations, Daniel Havas. I'll now hand over to Amanda. Please go ahead, Amanda.
Thanks, Jen. Good morning, everybody. Thank you to all those who have joined the call today. It seems just like yesterday that I was talking to you with the half year results, the sort of quarterly reports do, do bring us altogether on a -- well, a regular and frequent basis every quarter. We're delighted, of course, to present another excellent quarter. Our production was in line with our planning. As I've identified in the quarterly report, we've opted to keep production at 75% of Lynas NEXT rate. We continue to have challenges, both with inbound and outbound logistics. And until we're able to build a significant store of concentrate ahead of the plant in Malaysia, it's not our intention to dial up production significantly. We keep putting concentrate on the water, but it keeps having sort of variable delivery dates. I'm pleased that our costs are in line with plan and remain very much under control as we're operating at the 75% level. Of course, the market remains very buoyant, and we're delighted with that. NdPr pricing is strong. Pricing for heavies is also very strong. And demand also is very strong, with many of our customers not only back to pre-COVID levels, but some of them, in fact, looking to further growth in the short term. Like many other firms, we were frustrated that our ship got stuck in the Suez Canal. And so as we look at our results here, we were well and truly on track for a absolute record quarter, but there was a couple of hundred tonnes, frankly, that didn't make it before the end of March as a result of delays in shipping, But that material has left our plant in early April. We -- I guess where I'd like to -- I mean some of the business as usual is pretty clear from our -- from the report and just sort of a moment thinking about in this strong market, how do we make sure that we meet our objective of growing with the market. So as demand grows, how can we ensure that our capacity grows? And of course, that's associated with some of our key projects. And keen readers will note that, certainly, the expectation from Chinese producers is that the market will continue to strengthen with some quite significant announcements regarding capacity uplift. So our key projects, which are going to allow us to grow with the market, include, of course, the Kalgoorlie project and the work on the development of our U.S. rare earths processing facility. So Kalgoorlie first. Kalgoorlie is -- work is continuing at pace. The project team is growing as is -- would be expected at this stage of the project. And we now have most of the key positions with respect to managing that project within Lynas are now filled. And we are making really good progress on letting the tendering and letting contracts for a variety of different pieces -- elements, equipment, engineering and other works. We've included some photos in here so you can see how far progressed the fabrication of the kiln is, which is, of course, very exciting. But as well as that, as part of the approval process, the EPA has given us limited -- approval for limited preliminary works on site. And it's important to note that these are works which will ensure that when we start receiving the equipment, providing we have the final approval, we will be able to move quickly. But they are not works which presuppose a ministerial decision. So the relevant act provides provision for mine or preliminary works that are associated with an implementation of the proposal but are unlikely to have a significant environmental impact, and that's exactly what we're doing at present. But it is very exciting to actually have people on site doing those works. We've started to see a slight ramp-up of capital associated with the Kalgoorlie project with a further step-up expected in this quarter ahead of, as we've indicated previously, the large capital spend, which we expect will be primarily in the FY '22 -- in financial year '22. Of course, the other exciting news during the quarter, which we did cover when we did the annual results, is the agreement from the DOD for a contract to partly fund the development of a Light Rare Earths facility, which we proposed to have operating alongside our already planned Heavy Rare Earths and specialty facilities. This effectively means that our facility in the U.S. is really a very substantial facility with light separation, heavy separation and specialties all on the one site. We think it's very exciting and really provides the fundamental sort of foundation for the development -- the further development of the rare earths ecosystem in the U.S. So we really think about it as a platform for development of further activities in line with government policy. And of course, we've all seen that governments continue to be very focused on the rare earth sector. And of course, as we think about this, it's for reasons which are strategic. Of course, geopolitics are an important part of that and ensuring that there are resilient supply chains in all key supply chain areas, but particularly for critical materials, is at the forefront of government thinking. The second area is, of course, that these are materials which underpin new technologies and modern manufacturing capability. And so governments all around the world, they're keen to ensure that they are part of the significant development that we expect to see over the next couple of decades as we adopt new technologies, which are going to be, frankly, better for our planet but also better for consumers. And of course, the third reason why governments remain very focused on this sector is that it is a critical part of economic recovery. And as we see the continuing demand in key sectors for our materials, we see this as being a very positive thing for our industry and also for all of the industries which we feed. So as I said, I mean I don't have a lot more to say other than the quarterly report. It speaks for itself. Again, a very good quarter. We continue to see very positive and buoyant market conditions and are looking forward to finishing the year in very good shape. So with those as introductory comments, I'm very happy to take any questions that people might have.
[Operator Instructions] We have multiple questions in queue. Our first telephone question comes from Jack Gabb from BofA.
Just a couple from me. Firstly, just on the, I guess, the disparity between production and sales. You mentioned a couple of hundred tonnes were caught up around the Suez. But obviously, the difference between production sales was a bit larger. So just curious whether you can make up the reduced shipping volumes this quarter or are we going to see a further inventory build. I'll start with that one.
Jack, all of that products left the plant now. I'm not going to tell you what our sales revenue in the first 2 months of April is, but suffice to say, I have a very big smile on my face.
Okay. And then can you give us the latest on the permitting for the PDF? Have you completed the EIS?
So the EIA has been -- we've been working very closely with all relevant authorities. The EIA is largely complete. Documentation was lodged quite some time ago, and it's been out for public comment. We've taken on -- and engagement. So we've taken on comments which are relevant. I mean, there are a few which have come online which are not particularly relevant, like what effect it might have on the stray dogs in the area. But we've certainly taken on all of the informed technical information to improve the EIA and undertaken significant engagement with local communities so that they understand really the effect of the EIA, the safety conditions associated with the project and have been very pleased with the support that we have received from those local communities. Within the next few weeks, the EIA will be finalized with the DoE decision on it. And I say all of that in the context of the fact that, as you're aware, we already have agreements and approvals from a variety of other authorities and, in fact, a head authority, which is the AELB, which has identified that this is an appropriate site.
Perfect. And then just one last one. You mentioned getting final approval for cracking and leaching. Just curious when you expect that.
I never, ever, ever suppose when any regulatory authority or government may make a decision. Once again, pleased to be able to advise that we have lodged the relevant documentation, and we have been really delighted with the speed with which assessments have been made. But the regulators have a task. They need to do it diligently. So it will take the time that it takes. And our focus is always on ensuring that they have the best possible information. Where we do that, then approvals can be turned around fairly quickly. Where we don't do that, of course, that takes a little bit longer. But the documentation is -- has been lodged with the regulators. And so we will certainly advise when we get relevant decisions.
Our next telephone question is from Dylan Kelly from Ord Minnett.
Yes. Two quick ones from me. Just firstly, I'm curious as to the WA permitting, the mention of a second project area for residue storage. Obviously, that raises a couple of eyebrows in terms of what's going on there. Could you just walk us through the requirements for the secondary for waste disposal? And does that throw us better in the works? Or is this just steady as she goes?
Yes. Okay. You may have missed it earlier. So we have actually advised that we have 2 sites in Kalgoorlie to Lot 500, which will be the primary site for the processing facility and a lot at Yarri Road, which will be used over the life of the processing facility for storage of by-products produced at the facility. And this is simply reflecting the fact that over the life of the facility, the Lot 500 will not be sufficient for storage of all of that by-product material. It has been a core part. It was in our initial discussions with Australian mines authority, in line with their policy position that any project should have, not only its operating parameters but also its closure plans in place right from the beginning is the reason why Yarri Road has been included. But it's not a change.
Okay. Understood. Just in regards to CapEx and project spend, $10 million for the quarter. I thought we were going to -- I thought we're getting to the pointy end of construction preworks and paying for a lot of the obvious progress that you've made with procurement of key pieces of kit. When should we start the -- expecting large licks of capital start being paid for all the various project works that we've got going on?
Well, I think $10 million is quite a lot more than we have as a normal CapEx profile.
True.
So we are starting to see it now, Dylan. And the vast majority of that $10 million is actually associated with the 2025 projects. We expect that, that will step up probably by about double this quarter, and it will continue to increase as we move into FY '22.
Okay. Great.
We're not in a rush to spend the money. And if we can agree payment terms at the work commencing and relevant payment terms, then there's no reason why we should be spending all of our cash upfront.
Our next telephone question is from David Deckelbaum from Cowen.
I was curious -- just wanted to get some clarification. You mentioned, obviously, in the release that you see some of your competitors, namely in China, ramping up capacity, presumably to meet demand. How do you reconcile that with how you feel about the market right now and pricing and what you're seeing on the demand side? Certainly, you're seeing recoveries here, but do you see a situation where the overall market is still going to have a difficult time keeping pace with demand?
So look, demand is strong, particularly for the magnetic materials. Although interestingly, immediately sort of post COVID in the first quarter, sort of about this time last year actually and sort of March through to June, we saw a complete, not quite collapse, but really substandard pulling back in the catalyst sector, particularly, of course, in fuel catalytic cracking because planes weren't flying and cars weren't driving and all of those sorts of things during those lockdowns. We've seen that recovery come really back -- this quarter was probably the first that we've really seen a real recovery in that area. And similarly, in some of the auto cat sector, we've seen it not quite back to where it was but certainly, it's recovered somewhat from sort of the really substantive reduction last year. Magnetic materials, through the sort of the COVID challenges, have held sort of their own in terms of demand. And of course, as we're aware, prices strengthened during that period. And we think those are fundamental trends, which see continuing growth in the key sectors, remain very favorably poised. And so we're looking forward to a very good sort of few years ahead of us. But as I've said, one of the reasons why they're investing in additional capacity is that we've always articulated our strategy that we will grow with the market and we will maintain our share in the highest-value segments, which is where we write most of our business. And so we really are focused on giving ourselves that ability to be able to ramp up as market demand continues. I think that as we look at some of the largest players in China, of course, it's -- their ability to leverage is quite strong. And so I'm not surprised that they're looking at being able to increase their production in exactly the same way as we are to ensure that we can meet demand. But we see the market setting as very -- sitting very favorably at present and would expect that, that will continue in the foreseeable future.
I appreciate that. If I could just ask one more just on the U.S. expansion. I think you mentioned that you have a proposal, a design proposal, on the heavy separation facility by June. Can you refresh us on the time line for how you're thinking of submitting proposals around the light separations facility? And would you look to begin construction concurrently on both projects? Or would you sort of do the heavies and the lights in queue?
Yes. It's a good question, David. I mean -- and I said the -- to the fact that both of these contracts or both of these initiatives are now being considered by the U.S. government as areas worthy of support, certainly upsizes the facility that we're considering in the U.S. And we certainly are not looking at them as 2 separate project. I mean, ultimately, we're talking about creating a platform for rare earths in the U.S. And so we need to be thinking about both of these projects concurrently. We need to understand, therefore, infrastructure and other capabilities which are necessary to support a facility of the size that this is going to be. With respect to the heavies, we have basically completed our homework on design and engineering, and we'll be submitting that for consideration with the DoD in the near term. With the lights, we still have additional engineering work to do on that and some of this other work with respect to really what this is now whole facility looks like as opposed to just sort of the separate production unit. We will keep people up to speed on it but it is clearly a conversation which we need to have with the USG (sic) [ USGS ], and we're doing that on an ongoing basis.
Our next telephone question is from Reg Spencer from Canaccord.
Just shifting back to Kalgoorlie. Outside of the permitting, which you ran through a little bit earlier, are there any other impediments or risks that may impact your instruction time line there? You mentioned that you are experiencing some challenges on the shipping international logistics, and I fully appreciate that there are quite a large element of your construction and manufacturing of that facility that will be happening domestically. But is there anything there that might present as a risk to achieving commissioning of Kalgoorlie in late 2022?
Reg, this is a big project. It's a $500 million project. And we have a comprehensive risk register associated with this project. Otherwise, we wouldn't be running the project well. And we also have a comprehensive list of mitigants associated with those risks. But there are many risks associated with the project. At this time, our assessment of the risks and the mitigating strategies that we've been able to put in place tell us that we have no red light. So I understand your point around the inbound logistics, and we are very alert to that. Of course, there are some slightly different challenges when we're talking about a single shipment of a large piece of equipment compared to what we're talking about with needing to find ships every week or every couple of days either in or out of Malaysia. So we -- it's not one of the risks that we've got as sort of a high risk at present. But of course, there are many risks associated with Kalgoorlie, but our project team's task is to ensure we've identified them and put in place mitigating strategies, and we've done that.
Okay. Understood. One last question attached to Kalgoorlie. As you progress through detailed design and commence construction works, are you seeing any material cost inflation, things like steel? I think most people would be well aware of labor constraints in Western Australia. Not that, that's going to present a risk to your liquidity, but are you seeing any cost inflation there over and above what your original estimates on the CapEx might have been?
No, not at this time. We've got -- actually we -- the team has done an excellent work around specification and tendering for major equipment. The project director keeps on telling me he won't give me back any of the contingency quite yet. But we haven't had to dip into the contingency for any elements. So we are largely placing our purchase orders in line with our original expectations.
Our next telephone question is from Michael Evans from Acova Capital.
David actually asked most of my questions. But just on China North Rare Earth (sic) [ China Northern Rare Earth ] increasing their production, say, doubling it over the next 3 years. I wasn't aware of that. Can you sort of elaborate on what you know about that? And maybe also remind us how much they produce. I thought that produced like close to 50% of the world's NdPr oxide or something like that. Maybe you'd have a better figure than me. And have they given any sort of color on whether that's going into -- whether they're increasing the sort of rare earth magnet production by that magnitude as well? What do you know about that announcement?
I don't know a lot more than I've already told you, Michael. I mean, these things, as we all know, can sometimes be a little opaque. But the first thing to say is China -- is Northern Rare Earth is about 60% of China's production. So it is a very substantial step-up, which is the reason why we've flagged it in the report. And Baotou, which is in Mongolia, is a whole jurisdiction that takes a great deal of pride in it being the center of the rare earths universe. I would love it if we could get to that same sort of position with some of our locations and over the years has really established substantive capability at all stages of the value chain right through to the production of electric motors today. So the increasing production output in this area is a significant indicator of their expectation that the market will continue to grow and will continue to flourish. And so yes, it's a big step-up, and we see it as a very sort of positive sign in terms of confidence in the market.
Fantastic. And maybe just one more on the market-conscious pulse on the call. But with regards to your Japanese customers, can you give us any color or insight on what their magnet production is -- growth has been over the sort of last 3 to 6 months relative to sort of China's magnet production or global magnet production? Are they still sort of full steam ahead? Or anything you can give us there would be great.
So look, I don't know the relative number there, Michael, Japan versus China in terms of growth. What I do know is that our demand from our Chinese customers has more than recovered -- sorry, from our Japanese customers has more than recovered pre-COVID levels. And as we're looking to future [ tautology ], future forecast, as we're looking at our forecast, that, that growth is expected to further -- to continue further. So our experience in the market is that the Japanese market is very buoyant, and that's a very positive thing for our business. But whether that sort of recovery and growth is at the same or higher or lower sort of velocity than what's happening in China, I don't have that information to hand. But I'm sure that, separately, we can have a look at that.
Our next telephone question is from Matthew Chen from Foster Stockbrokers (sic) [ Foster Stockbroking ].
I just wanted to drill a bit further down on that Northern Rare aspect of the announcement. So just wanted to check if that production capacity, do you understand that to be the mining rate or the separation and smelting capacity? Which maybe I misunderstood, but I always thought the separation smelting capacity wasn't an issue. It was essentially limited by the quotas, which have -- I understand have been growing quickly over the last couple of years. And so do you understand it to be in step with a listing quotas? Has that been kind of flagged by central authorities?
Look, the China market is -- the Chinese market is quite complex and, as I think everybody knows, relatively opaque. We don't have a bunch of helpful JORC Code resource reserve statements and all of those sorts of things. What we do know is that Northern Rare Earth has a very long-life supply of rare earths as a consequence of the material as being -- as a by-product from their iron ore mining operations. We also know that there's, over time, been plenty of sort of separation capacity in China. But I go back to sort of Northern Rare Earths and the investment and capability that they have in terms of their whole of rare earths business. And so it's -- as we think about their increasing capacity, it's ensuring that these facilities are operating well and efficiently. They remain, we would say, the only ones who are lower cost than us but they are lower cost than us, and that's not just a volume effect. It is sort of the quality of their operations as well. And so we, as you know, are very focused on what can we do to make a further step down in terms of our costs. So I can't tell you exactly how it factors into any existing facilities that they might have. Just let -- we're just sort of flagging what has been sort of announced. And as I said, we see it primarily as a positive thing and a large and professional and really sort of focused organization like Northern Rare Earths, which will take a very professional approach to this sort of growth, I think is generally a good thing for the market.
Yes. And like you said, I think, already that it shows quite sort of strong faith in the demand side of the market. Because I mean I note that production quotas have already increased sort of 50% over the last 3 years. And if they run rate the second half quotas with the same as the first half, they'll be on 80-something thousand tonnes of rare earth production or lights for the year, won't they? So to double that again in 3 years, I just think that there's potentially -- my -- sorry, my understanding is essentially that it was always limited by central authorities rather than any limits to the resource or their capacity.
Certainly, there is that element to it. And sometimes, the increase in quotas is more about "legalizing production," which is already occurring. So our indications, and bearing in mind, we've not had anybody been able to visit China for nearly 2 years now, so we're working on sort of the advice coming down the line. But our indications are that the market demand is very buoyant in the Chinese magnet sector.
And just on -- are you -- I mean have you sort of filtered -- sort of heard anything filtered through about the situation in Myanmar and shadow and legal production or particularly kind of the mining from that market in terms of [ mining ]?
I have no direct knowledge of any impact from Myanmar. Logic says that there must be, but I have no direct knowledge.
Okay. And just a final one on the reference to the judicial review application. Just remind me, this is a review as to the process of the 2019 renewal. But it's judicial review, so essentially, that original decision, that kind of ministerial decision can't change. Is that -- that's the nuts and bolts of it? There's that judicial review application in May, but that's it. I recall having a conversation with Andrew about this.
Yes, it's a strange case. It relates to license, not our current operating license, but the operating license prior to that. So I mean it's -- I think that from the legal documentation that we've seen, that the government's position is consistent with ours and essentially that it's not relevant because the subsequent renewal of the license has been made.
[Operator Instructions] And we have a question from [ Tom Sumatsu ] from [ Bluebird Asset ].
You may have covered this earlier on [ Amanda ]. I was just wondering, what's stopping Lynas from ramping up to 100% capacity on Lynas NEXT in Malaysia?
Really, it's primarily associated with some of the challenges that we have around logistics at present and particularly related to getting concentrate shipments from Mt Weld to cross to Malaysia on a predictable basis. So we normally like to carry between about 15 and 20 days' stock in front of the plant. And we've found it very difficult to sustain that. At one stage, I think that it's worse. We had something like 32 shipments on the water, which had been rescheduled up to 6 to 8x each. So it's -- and this is just a direct consequence of some of the issues associated with COVID, congestion in the Singapore port, et cetera. And so primarily that -- the concentrate issue sort of guides us, but of course, it's also related to other inputs. And so we sought to increase inventory on the shore so that we can continue to operate at our target levels. But what we don't want to do is to ramp up production and then find ourselves needing to shut the plant down because we don't have sort of inputs because the plant is running well and in very stable operation. And it doesn't like being -- like any clinical plan, it doesn't like being turned on and off. So really, we continue to really focus on doing this, and we've put a lot of stock on the water to try to really sort of build that stock. But we are finding just ongoing challenges with getting -- we're not like sort of the big iron ore miners with our own sort of charters. We need to find space on ships for containers, and yes, it just continues to be a bit of a challenge.
Okay. So this is not relating to any permitting restrictions or limitations as to production throughput?
No, no, no. It's quite a deliberate decision. And it's also associated with some of our health and safety protocols that we have in place. As many people would know, Malaysia is in -- still experiencing a third wave of COVID. And so we are complying with all requirements to sort of be careful with how many staff we have on site and how we're managing them and all of those sorts of things. So the 75% level allows us to manage our business with some headroom for dealing with unexpected sort of disruptions that might occur in all of these different areas.
Okay. And final one. So I mean the pricing environment is relatively favorable. And I mean do you have any kind of -- it's a difficult question, but do you have any kind of thoughts or guidance in terms of when we can get to 100% of next production capacity?
I can tell you that there are many of us in the business that would very much like that to be tomorrow, but it is a balance. And I'm sitting, looking at our forecast on inventory and sort of some of these other areas. And as said, even with some of our inputs, who would believe that a ship could block the Suez Canal? And so some of the inputs that come from the Middle East and Europe for our plant, of course, have been delayed. So we review this on a weekly basis. And I can ensure you that given strength of price and demand at present, that the minute that we think that we can do this in a sensible way, we will be doing it.
There's no more further questions at this time. I'd like to hand the call back to Lynas for closing remarks. Please go ahead.
Terrific. Thank you very much, and thanks all for joining today. As I said, I think it's -- we've delivered an excellent quarter. We certainly are managing to deliver exactly what, I think, many of our shareholders who were with us -- have been with us for the past sort of 4 or 5 years. I remember saying in about 2017 that we were leveraged -- that we were positioned to take full advantage of any upside in price. I think that we're seeing the benefits of that today and look forward to speaking with you again in another 3 months when we look at our full year outcomes. Thanks all. Bye.
Ladies and gentlemen, that does conclude the call for today. You may all disconnect. Have a great day. Goodbye.